Conventional Loans

If you’re shopping for a mortgage you have probably heard about conventional loans. But what exactly is a conventional loan and how do you know if it’s the right type of mortgage for you? In this article we’re going to break down conventional loans and go over the pros and cons.

What is a Conventional Loan?

A conventional loan is a mortgage that is not backed by any Government agency such as the Federal Housing Administration (FHA) or Veterans Administration (VA). Conventional loans meet the lending requirements of Fannie Mae and Freddie Mac, the two largest buyers of mortgage loans in the US. Most conventional mortgages are issued by private lenders who then sell the loan to one of these Government Sponsored Entities (GSE’s)

Conventional Mortgage Requirements

Credit- The minimum credit score requirement is typically between 620-640 depending on the lender.

Occupancy- Conventional loans can be used to finance a primary residence, a second home, vacation property or a rental property. This is in contrast to government-backed loan programs which can only be used to finance a primary residence.

Property Type- Single-family homes, duplexes, 2-4 unit properties,condominiums and townhouses are eligible.

Income- Income will be verified by reviewing recent pay check stubs, tax returns and W2s. Debt-to-income ratio must not exceed 43%.

Assets- Bank and investment statements will be verified to ensure the borrower has sufficient assets to close. These funds must be able to cover a down payment plus associated closing costs.

Government-Backed Loans

Government-backed loans are issued by private lenders and guaranteed by the Federal Government with programs such as FHA or VA. Conventional loans are not insured by the government but by private mortgage insurance companies.

FHA Loans An FHA mortgage is popular for it’s low 580 credit score requirements and 3.5% down payment.

VA Loans VA loans are for Veterans, they come with no downpayment or mortgage insurance.

USDA Loans – The Department of US Agriculture created the USDA guaranteed loan program for low-to-median income homebuyers in rural areas of the country.

 

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