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Conventional Loan Tips

As low as 3% down payment

Conventional loan requirements aren’t as tough as many home buyers expect. Borrowers can often qualify for a conventional loan with a credit score of 620 or higher, reliable income, and at least 3% down. Additionally, lenders usually seek a two-year track record of steady income and employment. To verify your financial information, you’ll need to provide financial documents such as bank statements and tax forms.

Gone are the days when a 20% down payment and perfect credit were absolute prerequisites for securing a conventional mortgage. So don’t let those “traditional” standards get in your way if you’re ready to buy a home now.

Tip #1 - What is a conventional loan?

Conventional loans are those underwritten by lenders to "conform" with Fannie Mae and Freddie Mac's guidelines. These guidelines and maximum loan amounts are very specific and constantly being modified by these organizations--called Agencies by lenders in the know. Although their guidelines are very similar, there are still slight differences between the two and this can potentially cause some confusion --and transaction issues-- when some loan officers aren't experienced or up to date on the latest guideline changes.

Tip #2 --Differences between lenders

Although Fannie Mae and Freddie Mac set the minimum conventional loan requirements, it’s important to note that lenders can set their own additional underwriting criteria--called underwriting overlays. For instance, while Fannie and Freddie’s guidelines permit a conventional loan with just 3% down payment, some lenders require 5%. Lenders might also set higher standards for a minimum credit score or reject a buyer with a higher than usual debt-to-income ratio. Some lenders will also vary on the type and quality of documents you need to provide for loan approval which can sometimes cause some difficulty obtaining- as well as confusion. All the more reason why an experienced loan officer is so vital.

Since requirements vary by lender, it can be helpful to shop around --and talk with a very experienced loan officer when you find yourself with some borderline qualifying issues.

Tip #3 Loan limits

To obtain a conventional conforming mortgage, your loan amount must fall within local loan limits set by the Federal Housing Finance Agency (FHFA). These loan limits change annually, and are generally higher in areas with exceptionally high property values. In 2024, the conforming loan limit for a single-family home in most of the U.S. is $766,550, while high-value loan limits go up to $1,149,825. You can check your area’s current conventional loan limits here.

In cases where loan amounts exceed the specific limit, borrowers might need to apply for a non-conforming loan or a jumbo loan which typically requires stricter underwriting guidelines that can vary greatly between lenders-- and with down payments ranging between 10% and 20% down.

Tip #4 Conventional loan rates compared to government loan rates - FHA, VA and USDA

Conventional loans and government loans make up most of the mortgage market — most home buyers end up with one or the other. But which one is right for you?

A very experienced loan officer can help you compare the total loan price--not only rate, but lender fees as well as a loan programs' specific mortgage insurance requirement, as well as funding and guarantee fees on certain government loans. These government "insurance" fees typically are upfront and can be financed into the loan ---as well as FHA and USDA having monthly mortgage insurance included with your monthly mortgage payment.

A conventional loan with less than 20% down payment will have mortgage insurance called PMI. Lenders use factors from several different independent mortgage insurance companies to calculate this PMI and it's typically based on loan to value, property type, loan term, borrower's credit score and debt to income ratio. Based on the lender's choice of a PMI company and their individual contracts/agreements with them, these PMI rates can vary. So the amounts ultimately charged for PMI by one lender can be different from another. And in some cases one lender can be hundreds of dollars cheaper on the monthly payment than another lender.

So --something very few rate shoppers consider -- when shopping conventional loan pricing you need to also shop what the lender will charge for PMI. A very experienced loan officer can explain PMI options as well as what steps might be taken to lesson the amount you would pay for PMI.

Tip #5 Rate differences

Government loans are almost always lower than conventional loan rates-- by anywhere from a quarter percent to as much as 1% lower, but how much lower depends on each borrower's qualifying criteria as well as the property transaction characteristics. However when you factor in those funding, guarantee and monthly mortgage insurance costs it will most likely be a conventional loan that is the lower cost option.

Tip #4 Conventional versus government property inspection and condition requirements

Although government loan programs can have stricter property condition and inspection requirements, they are often not that dissimilar to conventional. The common misconception in the real estate community is a property that needs lots of repairs will have a tougher time going with a government loan as opposed to a more "lenient on condition" conventional loan. That is not always the case. A property with observable health and safety issues--issues that make occupancy post closing a health and/or safety problem to the buyer -- will likely be a problem that may need to be corrected prior to closing --no matter the loan type.

As always-- feel free to reach out--I'm happy to answer all questions!

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