CONVENTIONAL MORTGAGE

What Is A Conventional Mortgage?

A conventional mortgage or conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity. Instead, conventional mortgages are available through private lenders, such as banks, credit unions, and mortgage companies. However, some conventional mortgages can be guaranteed by two government-sponsored enterprises; the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

  • A conventional mortgage or conventional loan is a home buyer’s loan that is not offered or secured by a government entity.

  • It is available through or guaranteed by a private lender or the two government-sponsored enterprises—Fannie Mae and Freddie Mac.

  • Potential borrowers need to complete an official mortgage application, supply required documents, credit history, and current credit score.

  • Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans.

How Does A Conventional Mortgage Work?

Potential borrowers need to complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.

Proof Of Income

  • Thirty days of pay stubs that show income as well as year-to-date income

  • Two years of federal tax returns

  • Sixty days or a quarterly statement of all asset accounts, including your checking, savings, and any investment accounts

  • Two years of W-2 statements

Assets

You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need gift letters, which certify that these are not loans and have no required or obligatory repayment. These letters will often need to be notarized.

Employment Verification

​Lenders today want to make sure they are loaning only to borrowers with a stable work history. Your lender will not only want to see your pay stubs but may also call your employer to verify that you are still employed and to check your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.

Documentation

​Your lender will need to copy your driver’s license or state ID card and will need your Social Security number and your signature, allowing the lender to pull your credit report.

How To Qualify For A Conventional Mortgage?

People with established credit and stellar credit reports who are on a solid financial footing usually qualify for conventional mortgages. More specifically, the ideal candidate should have:

Credit Score 
Loan amount under $25,000: Prime rate + 4.25%
Loan amount of $25,001 to $50,000: Prime rate + 3.25%

Loan amount over $50,000: Prime rate + 2.25%

Debt-To-Income Ratio (DTI)

Loan amount under $25,000: Prime rate + 4.75%
Loan amount of $25,001 to $50,000: Prime rate + 3.75%
Loan amount over $50,000: Prime rate + 2.75%

Down Payment
A down payment of at least 20% of the home’s purchase price readily available. Lenders can and do accept less, but if they do, they often require that borrowers take out private mortgage insurance and pay its premiums monthly until they achieve at least 20% equity in the house.

In addition, conventional mortgages are often the best or only recourse for homebuyers who want the residence for investment purposes, as a second home, or who want to purchase a property priced over $500,000.

What Disqualifies You For A Conventional Mortgage?

Generally speaking, those who are just starting out in life, those with a little more debt than normal, and those with a modest credit rating often have trouble qualifying for conventional loans. More specifically, these mortgages would be tough for those who have:

Suffered bankruptcy or foreclosure within the past seven years
Credit scores below 650
DTIs above 43%
Less than 20% or even 10% of the home's purchase price for a down payment
However, if you're turned down for the mortgage, be sure to ask for the bank's reasons in writing. You may qualify for other programs that could help you get approved for a mortgage.

For example, if you have no credit history and you're a first-time homebuyer, you may qualify for an FHA loan. FHA loans are loans that are specifically tailored for first-time homebuyers. As a result, FHA loans have different qualifications and credit requirements, including a lower down payment.

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