Conventional loans are the most commonly known financing programs, yet they are also the hardest to qualify for. If you have had any credit blemishes recently, it is typically hard to get this type of loan. Right after the most recent housing disaster, these loans were very difficult to obtain unless you had perfect credit, a low debt ratio, and a low LTV. Today, luckily, the requirements are easier, but they are still harsh enough to ensure that you can afford the mortgage and have a low risk of default. Just as is the case with any other financing program, every lender has their own requirements – if one lender turns you down, do not be afraid to apply with another to see if they have different requirements. In general, conventional loans go through the automated system, leaving little room for manual approval, but for those with special circumstances, lenders can impart their own overlays, which can help some borrowers in certain situations.
Credit Score Requirements
Everyone always wants to know the minimum credit score for a loan program. While there is not a score set in stone for this program, most lenders will not even consider a score lower than 620. This means they will not run it through the automated system or process the loan at all as 620 shows financial irresponsibility and the automated system would send it back with a denied status. If your credit score is above 620, you should be able to get a status from a conventional lender. Not all applications will get through the underwriting process without the need for a manual underwrite as conforming lenders look at the borrower’s whole picture, not just his credit alone. That being said, as long as your credit score meets the minimum, it is worth applying for this type of program.
Credit History Problems
As stated above, the conforming lenders like to look at the whole picture you provide on your loan application. If your history shows a bankruptcy or foreclosure, you will have to wait for a specified period of time. The good news is that the waiting periods for conventional loans used to be the longest out of all programs available, but as of late last year, the parameters changed. You can now qualify for a conforming loan just 2 years after the derogatory event; whether it was a bankruptcy, foreclosure, or short sale as long as you can prove extenuating circumstances that were a one-time occurrence. For example, if your company closed and you lost your job, which caused you to lose your home due to lack of income, that is a one-time occurrence. As long as you show that you picked up the pieces, got a new job and started paying your bills on time again, you can use the extenuating circumstance and lower your waiting period. If you do not have an extenuating circumstance, however, you may need to wait 4 years from the date of the discharge of your derogatory event.
Down Payment Requirements
The down payment requirements are also stricter for conventional loans than any other available options, but Fannie Mae did recently come out with the option to put down just 3 percent on a home in order to be more competitive with FHA loans. In fact, this option is often more affordable than the FHA loan because of the lower costs associated with it. Here are the options for conforming down payments:
- 3 percent – If you choose to use the Conventional 97 program, you can put just 3 percent down on the home. The funds can come from a blood relative, guardian, or soon-to-be spouse. In addition, for this program, you must purchase a single family home (not a multiple until) and get a fixed rate loan.
- 95 percent LTV or lower – If you wish to put down a larger down payment, the standard Fannie Mae and Freddie Mac programs apply. Any loan-to-value over 80 percent requires you to pay Private Mortgage Insurance, as is the case with most other programs. The funds can come from a gift as long as you document them accordingly, which means that the lender can follow a suitable paper trail to determine where the money came from and that it is not a loan from someone or somewhere.
Maximum Loan Size
As with any other loan type, there are many parameters that control your maximum loan size for a conforming loan. In general, however, most areas allow a loan limit of up to $417,000 for 2016. There are certain areas of the country, however, that have higher limits simply because of the higher cost of living in those areas. Areas of California, Washington, and Hawaii all have higher limits. In total, there are 39 counties throughout the country that qualify for higher loan limits due to how much it costs to live there.
In addition, lenders need to figure out how much you can afford in order to determine your loan size. Your debt ratio and loan-to-value ratio play a role. As stated above, only 97 percent of the home is eligible for financing and that is if you qualify for a loan of that stature. If your debt ratio is too high, the maximum loan amount you will qualify for will depend on the amount that keeps your debt ratio in line with the requirements.
Debt Ratio Requirements
Debt ratios are a very large factor in your loan approval. That being said, there is not a set-in-stone maximum, however, because most conforming loans go through automated underwriting. In general, the back-end ratio should not exceed 43 percent, but it is not unusual to see a loan with a 50 percent debt ratio get approved as long as there were compensating factors in place, such as a high credit score, plenty of liquid assets, or a low LTV. On the other hand, if you have many credit blemishes, you can expect your debt ratio maximum to be much lower than 43 percent. Every factor that goes into your loan application gets weighed in order to determine the non-risky debt ratio that allows you to pay your mortgage on time while getting the financing you need.
Private Mortgage Insurance Requirements
Private Mortgage Insurance for conventional financing is different than mortgage insurance charged on FHA loans. Your credit and loan-to-value ratio drive the premiums charged. The lower your credit score, the more of a risk you become and the higher your insurance premiums are. On the other hand, if you have a high credit score and low LTV, you will pay lower premiums. The good news is that in the conforming program, your PMI is not a lifetime charge. Once you hit below 80 percent, you can ask to have the PMI removed. If you do not ask, it will not be removed until you are at 78 percent LTV, as that is when the law requires it to be eliminated.
The closing costs on conventional loans are similar to any other loan. You will pay for standard items such as:
- Title Insurance
- Title Search
- Credit Report
- Discount Points
- Closing fees
- Escrow fees
As with any other loan type, you can shop around with various lenders as they all have different charges. The origination fees and discount points will depend on your exact loan circumstances. If you are a high risk, you can expect to pay more for these fees. If you are not a high risk, however, you any even find lenders that do not charge you any points for the loan.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.