Are you new to the home buying process and wondering what it takes to get approved for a home loan? Well today in this article, we are going to break down the conventional loan buying process requirements. So, let us first deal with the question of what is a conventional home loan. A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders, and its insurance is usually paid by the borrower. Conventional loans are much more common than government-backed financing. But what really is required to get this conventional mortgage loan?
Credit Score: It has always been a no-brainer that credit scores are the most factor in deciding your capability of buying a loan. For conventional loans, most lenders mark the score of 620 as the minimum requirement to get eligible for that loan. However, if you don’t qualify that criterion, it doesn’t mean that you won’t be able to buy a house but it means that you might have to pay a much higher interest rate. If you default, your credit scores will get hurt furthermore in this case.
Down payments: It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%. However, it’s not just for first-timers, anyone can get 3% down as long as your lender allows it. But this type of low-down payment typically means you have to pay private mortgage insurance (PMI). Anything less than 20% will require PMI. PMI protects your mortgage investors in case you default on your loan. And if you have a lower credit score and you are paying at #% down then along with the PMI you will also have to pay high-rated interest. So it’s always better to pay a higher down payment as long as you can afford it.
Debt-income ratio: Debt-income ratio is the percentage of a consumer’s monthly gross income that goes towards paying debts. The minimum monthly payments on all of your obligations, such as credit cards, vehicle loans, and school loans, can be added together, and your DTI can be calculated by dividing the total by your gross monthly income. Your DTI must be 50% or below for the majority of conventional loans.
Loan Size: Your loan must be within the Fannie Mae and Freddie Mac loan restrictions in order to be considered a conforming conventional loan. The loan ceiling is adjusted yearly. The conforming loan maximum for a single-family residence in 2022 is $647,200. However, there are several exceptions. The maximum loan amount in Alaska, Hawaii, and other high-cost regions of the nation is $970,800.
The bottom line is, conventional loans generally offer lower costs than other loan types, and if you meet credit score requirements and want a down payment of as low as 3%, a conventional mortgage might be the best solution for you.