What is a conventional mortgage?
Conventional mortgages conform to the guidelines of government-owned enterprises Fannie Mae and Freddie Mac. They are also known as “conforming” loans.
Conventional home loans usually are limited to $453,100 or less (One unit property). If you live in a high-cost area, however, your loan limit may be as high as $679,650 (One unit property). Call us at 1-360-676-9600 to ask about the conventional loan limit in the area where you’re looking to buy. If your loan is higher than the conventional lending limit (this is called a Jumbo Loan), it may have a higher interest rate.
Who qualifies for a conventional mortgage?
To be approved for a conventional loan, you will need to meet the following criteria:
#1: Good credit.
In order to attain a conventional loan, the borrower must have good credit. Good credit is defined as a credit score of at least 620, and preferably 680 or higher. You also need a good credit history, so it’s clear you pay your debts regularly and on time.
#2: No bankruptcies in the last 2-4 years.
You cannot have had a bankruptcy within two years of applying for a conventional mortgage. You can still apply—but you have to wait at least two years from the date of discharge of bankruptcy.
- Two years on a bankruptcy with extenuating circumstances only.
- Chapters 7 or 11 – A four-year waiting period is required, measured from the discharge or dismissal date of the bankruptcy action.
- Chapter 13 – A distinction is made between Chapter 13 bankruptcies that were discharged and those that were dismissed. The waiting period required for Chapter 13 bankruptcy actions is measured as follows: two years from the discharge date, or four years from the dismissal date.
#3: A minimum down payment of at least 3%.
You can qualify for a conventional mortgage with a minimum of 3% down payment, depending on Occupancy, CLTV, first time homebuyer and other additional factors.
- With a 5% down payment, the guidelines are more flexible.
- And with 20% down (or equity), you can avoid having to pay PMI (Private Mortgage Insurance) – which really reduces your monthly payment. (Ask us about other ways you can avoid paying PMI.)
#4: Money in the bank.
You need at least one month’s monthly payment in reserve upon applying for a conventional loan, and you need to retain at least that amount at least until your loan closes. For example, if your monthly payment is $1,700, you need at least $1,700 in reserves. Reserves can take the form of checking accounts, savings accounts, or 401ks, among others. – Reserves are subject to loan approval, the number of properties a borrower may own along with Loan to Value, and credit scores play a factor as well in reserve requirements.
#5: Mortgage insurance.
Conventional mortgages require mortgage insurance if the loan is for 80% Loan to Value or more of your property’s total value. (The percentage of your loan amount, compared to the value of your home, is called “Loan-to-Value”, or LTV.)
Would a Conventional loan be the right choice for you? We can help you understand your options and choose the loan program that best meets your needs and your financial goals.
To see if you qualify, call the Marie Bjornson Team at 360-676-9600.