So let’s dig in and see if a conventional loan is right for you. Here’s everything you need to know about conventional loans when buying a house.
When buying a house, many potential home buyers tend to shy away from conventional loans because they think the requirements are too tough. But the truth is conventional loans are more accessible than many people realize. In addition, conventional mortgages no longer require the 20% down payment that they once did. The minimum down payment is about 5% but putting down 20% does eliminate PMI. That saves money over the life of the loan or until their equity in the house is 20%. One can eliminate PMI when their equity is 20% if that is a feature your loan allows. Breaking down PMI The loan requirements for a buyer may not be as stringent as the FHA or VA loans. The actual property appraisal is not as stringent as a FHA or VA loan property. Some of the property guidelines are similar but not all. So people can qualify with less hassle.
Conventional Loan Overview
Buying a house with a conventional loan simply means that you are using a mortgage that is not backed by the federal government. Conventional loans are also often known as conforming loans because “they follow lending guidelines set by Fannie Mae and Freddie Mac. The terms are often used interchangeably, although not all conventional loans are conforming loans.” The FHA, VA or USDA loans are backed by the federal government so the qualifications can be different. FHA, VA and USDA loans have loan limits. And in Texas that can vary from county to county. Conventional does also and that can change from year to year. They are higher loan limits than the other types of loans. When one is buying a property with a very large sales price (like approaching a million dollars), the loan that has to be used is what is called a Jumbo loan but it is considered a conventional loan. Conventional Loan Options for Owning a Home
To qualify for a “conventional loan, you need to meet basic lending requirements set by Fannie Mae, Freddie Mac, and your individual lender.” Fannie Mae and Freddie Mac set the qualifying and minimum loan requirements, but “lenders can set their own stricter rules, too. For instance, you can technically get a conventional loan with just 3% down according to Fannie and Freddie’s guidelines. But some lenders require 5 percent. Lenders might also have higher standards for credit score or debt-to-income ratio.” While other loans have guidelines for items such as concessions, there is no standard for conventional loans. There may be different programs available with down payment assistance depending upon the area that you are purchasing. And that might vary from lender to lender so it is always a good idea to discuss those items with your lender. If you have not picked a lender at this time, we can always give you a few names of good lenders to talk to.
It always pays to shop lenders if you are on the borderline of qualifying for a conventional mortgage. If you get declined, talk to a few other lenders to see whether one will approve your mortgage application. Do so within a short time frame though as credit hits will hurt your credit score if spread out over a long period. Another factor in shopping for loan is each lender has different programs with different rates. I always tell my clients that you will “click” with some people better also. That can give you a better working relationship. Conventional Loan Limits Texas 2022
Qualifying Requirements
When it comes to qualifying for a this type of loan for buying a house, here’s what you will be looking at . . .
Credit Score
Typically, you’ll need a credit score of at least 620. But keep in mind that “a better credit score leads to lower interest rates and lower PMI costs. Borrowers with credit scores over 720 generally get the lowest mortgage rates.” Now in 2023 credit worthiness may become more stringent due to the economy at this time.
Down Payment
“One common misconception is that buyers need 20% down to purchase a home. However, standard conventional loans require just 5% down. And select conventional loan programs let you buy with only a 3% down payment.”
But if you don’t use a special programs, you’ll have to pay at least 5% down. You will also have to pay for PMI at full rates.
Income/Employment
To qualify for a conventional loan, you will have to prove at least two years of stable and consistent income “with the same employer or within the same field. Many types of income can help you qualify,” including bonuses, commission, and contract/gig work. And two years means two years, not one year and 11 months. That is a stringent guideline.
“Lenders will also “include other sources of income for qualifying purposes, too, such as retirement income, alimony, child support, and Social Security payment.” Just make sure you have the appropriate documentation to prove such income.
Debt-to-Income Ratio
“Mortgage lenders look at your income in comparison to your existing debt load when approving your home loan. Debt-to-income ratio (DTI) refers to the percentage of your gross monthly income that goes toward monthly debt payments (including the future mortgage payment).
“For a conventional loan, lenders prefer a DTI ratio under 36 percent. However, DTIs up to 43% are commonly allowed. And you may even qualify with a DTI as high as 45-50% if you have ‘compensating factors.’ These could include a high credit score or large cash reserves in the bank.” What is Debt to Income Ratio?
Conventional Loan Limits
For a conventional conforming mortgage, “your loan limit must fall within local loan limits set by the Federal Housing Finance Agency (FHFA).” These limits change from year to year, and they are usually higher in areas with very high property values.
Property Requirements 
In addition to these personal requirements, buying a house with a conventional loan also entails meeting certain property requirements., for example . . .
- It must be a single-family home or multi-unit home with no more than four units.
- It must be your primary residence and not a commercial property.
- The house must be structurally sound.
- There can be no claims against the property.
- An appraisal is required. Those appraisals are typically not as stringent as a FHA or VA mortgage loan.
To find out whether a house you’re considering qualifies, you can contact the Floresville agent to find out more. Just call (210) 216-7722 to discuss.
Final Points on Conventional Loans
Here are a couple of final points to keep in mind about buying a house with a conventional loan . . .
It’s not as difficult to qualify as many buyers think. Remember, this is all you need: a minimum credit score of 620, two consecutive years of stable employment/income, a down payment of 3-5%, and a DTI below 43% (usually).
“The mortgage process for a conventional loan can take, on average, between 30 and 45 days. Once you submit a full mortgage application, the loan files go through processing and underwriting, during which time the lender reviews all your financial documentation in detail.” But it is not necessarily a harder or longer process than any other type of loan and a shorter process than several other types of loans.
Lean on Your Lender and Agent’s Expertise
To determine if this type of loan the best financial choice for you? That depends largely on several factors as to whether both you and the property meet the qualifying criteria. Your lender can help if you do, and a good real Floresville real estate agent can help you determine whether the property does. To make the best decision when buying a house contact us today at (210) 216-7722.