A traditional loan is a sort of home loan that does not come under the category of insured or a guaranteed one by the government. These loans are offered by private entities including banks, credit unions, mortgage companies and any other financial institution. Conventional loans are those that meet the lending standards of Fannie Mae and Freddie Mac, the two major GSEs or government-sponsored enterprises that buy loans from lenders.
Eligibility Criteria In order to obtain a conventional loan, the borrower has to fulfill certain requirements set by the lender. This includes factors like:
Credit score – The conventional loans demand credit score of between 620 and 640. As with most forms of credit, the higher the credit scores are, the lower the interest rate and the better mortgage terms that one can get.
Down payment – Conventional loans allow for a down payment of at least 3% to as much as 20% of the cost of the house. This is the case because a higher down payment enables you to avoid paying for private mortgage insurance.
Debt-to-income ratio – This is the total amount of recurring monthly obligations including the future mortgage should not be more than 36-45% of the total monthly income.
Work record – You must have a stable work record for two years in the exact job line and credible source of income. Independent borrowers could be required to furnish extra documents such as tax returns.
Conventional Loan Types Within conventional mortgages, there are different loan types you can choose based on your budget, financial situation and needs:Within conventional mortgages, there are different loan types you can choose based on your budget, financial situation and needs:
Conforming Loans – These are conventional loans that meet the lending criteria set by the Federal Housing Finance Agency. The maximum conforming loan limit for 2022 is $647,200 for most counties and they may vary every year. They don’t require collateral, which makes them easier to obtain, and sometimes come with lower interest rates.
Jumbo Loans – These are conventional loans that exceed the standard size limits or what is commonly referred to as the conforming loan limits. Consequently, jumbo loans entail higher borrowing limits and come with higher requirements and costs than conforming loans.
This loan has a constant interest rate for the full term of the loan ranging between 10-30 years. The monthly installments are fixed, which means the expenses are also fixed in the case of hire purchase.
There is the adjustable-rate mortgage (ARM) where your interest rate varies depending on some market indexes throughout the loan. ARMs typically have a lower initial rate compared to fixed rate loans. However, payments may significantly increase after the expiration of the fixed period.
Benefits Some of the major benefits of a conventional home loan include:Some of the major benefits of a conventional home loan include:
Competitive Interest Rates – Unlike most guaranteed loans, conventional loans have better market-based interest rates depending on a person’s financial status and credit score. For people with better credit scores, lenders charge lower interest rates.
Lower Monthly Insurance – As compared to other loans, conventional loans enable you to avoid FHA mortgage insurance or pay less than 20% to help you eliminate private mortgage insurance. This also results in a reduced monthly payment.
Open Terms – You can opt for various loan amounts, fixed and variable rates, as well as terms of 10 to 30 years of repayment depending on your requirements.
No Prepayment Penalties – Unlike the other types of loans, conventional loans do not attract extra charges or penalties when you clear your loan early. This goes a long way in reducing the total interest charges.
Lower Quality Requirement – Traditional financing have relatively high quality requirements in terms of credit history and the debt to income ratio compared to FHA, VA, and USDA financing.
Higher Resale Value – The homes that have been bought using a normal loan that does not involve government participation are easier to sell in the market as compared to the houses that have been bought using government-insured loans.
Requirements When applying for a conventional home loan, keep these requirements in mind:When applying for a conventional home loan, keep these requirements in mind:
Property Eligibility – The property that you want to buy can be a primary residence this includes single single-family homes, condos, townhouses, and 2-4 units multi-family units.
Occupancy Status – Lenders will always prefer to finance properties that are going to be primarily used for occupancy greater than 183 days in a year compared to rental properties.
Home Condition – If the appraiser identifies defects or issues that render the property uninhabitable, your loan application may be declined.
Down Payment Documentation – If you are putting less than 20% down, you should prove your sources of funds for the down payment in the account. Like any other form of fund, gifted funds must also be documented.
Manual Underwriting or Desktop Underwriting System – Conventional loans for qualification are usually underwritten manually or in line with the set guidelines on the desktop underwriting system.
Closing Timeline – The whole process from application to closing may take approximately one to two months in the usual course of events. This depends on the time taken in property appraisal/underwriting.
The main advantage of conventional loans is that they present more flexibility and better terms than the FHA & VA government-insured loans. The eligibility requirements and the interest rates also vary depending on your financial status and credit history. Thus, there are low-cost conventional home loans available for borrowers who make the right choices of the lenders and compare rates. Compliance with the requirements and proper documentation is a way to achieve fast mortgage approval.
