CONVENTIONAL

HOME LOAN

5% Down Payment

FICO as Low as 620

50% Debt to Income Ratio

Cancellable Mortgage Insurance

What is a Conventional Home Loan?

A conventional home loan is a mortgage not directly secured by a government entity like the FHA home loan, however, it is guaranteed by government sponsored entities named Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac do not originate and initially fund mortgages, but they participate in the secondary mortgage market by purchasing and guaranteeing loans.  Although similar, Fannie Mae and Freddie Mac are two separate entities and each establish their own conventional loan guidelines that all mortgage lenders must comply with. Although Fannie Mae and Freddie Mac are not technically government entities, the federal government’s Federal Housing Finance Agency (not to be confused with the HUD’s Federal Housing Agency that insurers FHA loans) has been legally mandated to oversee Fannie Mae and Freddie Mac, since the 2008 real estate meltdown. 

A conventional loan requires a minimum down payment of 5% of purchase price. Mortgage insurance is required, unless the borrower has sufficient cash for a 20% or the property has reached to 20% equity. Conventional home loans are more suitable for borrowers that are more qualified than FHA borrowers, such as the ability to more towards the down payment, good to excellent FICO scores, and lower debt-to-income ratio. 

 

Requirements for Conventional Home Loan

Income

A minimum 2 year work history is required for lenders to be allowed to use income earned from employment. Self employment income allowed, however, to qualify requires a minimum 2 year tax return history and a current profit and loss statement. Other forms of income such as disability, social security, child support are also allowed if it meets specific guideline requirements.

Credit

A minimum 620 FICO score is required. No bankruptcies in the previous 4 years and no foreclosures in previous 7 years.  Collection accounts over $2,000 may have an adverse affect in qualifying and high consumer debt may limit the amount of home loan a borrower may qualify for.

Assets

A buyer will be required to have enough cash to cover the down payment and closing fees (click here for more on closing fees). Buyer must have cash in the bank or in a retirement account that allows an early withdrawal. A conventional loan also allows a family member to “gift” funds toward the down payment and closing fees.

Debt to Income  

The maximum allowed debt-to-income is 50%. This means that the mortgage payment, including taxes and insurance, plus monthly liabilities cannot exceed a buyer’s monthly income by 50%. For example, a borrower and his spouse earn a  combine $8,000 monthly salary with a combined monthly debt liability of $600. The borrower and his spouse are seeking buy a home and the estimated mortgage payment plus taxes and insurance is $2500. Does the borrower exceed the maximum debt-to-income allowed?

(mortgage payment and taxes and insurance) + (monthly debt liabilities) / (monthly salary)

$2,500 + $600 / $8,000 = 38.7% debt-to-income

The borrowers have a debt-to-income less than the maximum allowed (50%), so the borrower may qualify for the home loan purchase. Other factors are also taken into considering to qualifying. 

Property  

Purchase property’s condition must conform to Fannie Mae’s or Freddie Mac’s guideline standards. Any deficiencies in the property will be the buyer’s responsibility to repair before closing (seller may agree to make contribution for repairs). A 2-4 unit property is permitted. Condominiums are also allowed but condominium complex must follow guideline. Buyer must occupy property as a primary residence, 2nd homes and investment property are allowed.

Conventional Financing Breakdown

5% Down Payment

A 5% down payment is required. For example, if a buyer purchases a home for $300,000, the down payment required on the purchase is $15,000 ($300,000 x 5%).

Unlike an FHA home loan which requires two types of mortgage insurance, conventional home loans only require one type of mortgage insurance premium called private mortgage insurance or PMI for short. 

Private Mortgage Insurance (PMI) 

Private mortgage insurance (PMI) is required if the borrower puts LESS than 20% down payment on a home purchase, however, the PMI may be cancelled when the property has 20% equity.  

The private mortgage insurance premium payment will be based on the the borrower’s FICO and down payment. The higher the FICO and higher the down payment, the lower the PMI premium payment. PMI is paid monthly and will be added to the borrower’s monthly mortgage payments. 

 

Loan Limits

Loan limits vary by county.

 

Example of Conventional Home Loan Purchase  

This is only an example and not intented to give you accurate estimates on what your mortgage payment will be. Please contact our loan officer for a more accurate estimate.

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