Conventional Loans

Conventional loans are more of private loans as they are backed by private lenders with a bit of stricter lending guidelines as lenders tend to evaluate risk factors for all borrowers much higher compare to a government loan such as an FHA loan. These are loans that are not insured or guaranteed by the Federal Government.

The strength of borrower(s) credit score, income, assets and overall qualification may help them obtain a conventional loan. Each lender might have its own requirements/overlays so is best to compare and shop so you understand what is standard or not for qualifications.

Conventional loans have lower debt to income ratio and capped under 50% or even less now for most conventional loans so might be harder for a borrower to qualify if they have too much debts and income alone is not sufficient enough to offset that percentage to meet the debt ratio requirement. The smaller the debt ratio the higher the loan amount a borrower can qualify for which may give them an upper edge on home shopping in any real estate market.

Example of debt ratio: take total monthly debts of $1200 plus the new estimated monthly payment of $1500 equals to $2700/divided by estimated gross income of $4000 = .675 or 67% that’s too high so to qualify this percent needs to bring down by either paying off debts or adding another co-borrower to loan to increase more income.

Interest rates are higher as it depends on a borrower credit score and debt ratio and market rate condition at that time.

If a borrower has a derogatory event such as foreclosure on previous home on credit report, waiting time to be eligible for another conventional is 7 years. Waiting period can be shorter too depending on the borrower situation.

Down payment can be as little as 3% down or as much as 20% or more depending on borrower ability and funds available. Down payment can be gift fund from a family member or third-party organization. With smaller down payment of 3% it might require a borrower to attend a first- time homebuyer education and mortgage insurance coverage might be higher.

Mortgage insurance which protects the lenders in case a borrower default on their loan depends on borrower strength of credit score, income, and overall debt ratio. Some lenders allow a borrower to have an option for LPMI or lender paid mortgage insurance premium by offering a higher interest rate where the lender covers the MI for the borrower and the borrower would not have to have a monthly MI as part of their mortgage payment which can save them money but depending on loan size and situation, LPMI might not be the right option for some borrowers.

The above statement is for information only and/or subject to change at any time without notice due to the changing market conditions. Actual products and programs available to you may vary based upon a number of factors including your credit rating, asset, income and other qualifications.