How to Qualify for a Conventional Loan

Jul 14, 2023 | Mortgage Guides

Qualifying Made Easy: Steps to Secure a Conventional Loan

Conventional loans are the most common mortgage in the United States. They are regulated by Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs). In this article, we will discuss the requirements for qualifying for a conventional loan and the benefits. We will also provide tips on bettering your chances.

Whether you are thinking about buying a home or in the process of getting pre-approved, read on to learn more.

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What Is a Conventional Loan

A conventional loan is a mortgage that is not insured by the government. This means the lender assumes the risk if the borrower defaults. Banks, credit unions, and other private lenders offer conventional loans, which have stricter eligibility requirements than government-insured loans.

Still, conventional loans offer more flexibility with loan terms. For example, borrowers can choose the length of their loan term, which can be anywhere from 15 to 30 years. They can also choose to make biweekly or monthly payments. 

What are the Qualifications for a Conventional Loan?

To qualify, you must meet the following stipulations:

  • A good credit score.
  • A down payment of at least 3% of the home’s purchase price.
  • A debt-to-income ratio of no more than 36%
  • A stable income.
  • No recent bankruptcies or foreclosures.

Lenders may also have other requirements, such as a more stringent debt-to-income ratio or a maximum loan amount.

What Documents are Necessary for a Conventional Loan?

The following credentials are required:

  • Proof of income, such as pay stubs or W-2 forms
  • Proof of assets, such as bank or investment statements
  • Proof of residency, such as a utility bill or lease agreement
  • A driver’s license or other government-issued ID
  • A completed loan application
  • Appraisal of the property you are purchasing
  • Title insurance
  • Hazard insurance
  • Private mortgage insurance (PMI)

Please note that the specifics may vary. It is always best to contact the lender to determine the documents requested for the loan application.

Who Qualifies For a Conventional Mortgage?

To qualify, you must meet certain criteria:

  • Have a good credit score.
  • Have a down payment of at least 3% of the purchase price.
  • Be able to afford the mortgage payments.
  • Meet the lender’s income and debt requirements.

How Does Applying For a Conventional Home Loan Work?

This is a multi-step process that can take several weeks to complete. The following are the basic milestones involved:

  1. Get pre-approved: This will give you an idea of how much you can afford to borrow and what your interest rate will be.
  2. Find a home that you want to buy: Once you’ve found a home, you’ll need to make an offer and have it accepted.
  3. Apply for the loan: Once your offer has been accepted, apply for the loan with a creditor. They will review your application and decide whether to approve you.
  4. Close on the loan: Once the loan is approved, you’ll need to close and take ownership of the home.

The Differences Between Conventional Loans and Other Loans

Conventional Loans Compared to FHA Loans

The government insures FHA loans (Federal Housing Administration) and thus has stricter requirements, but they also offer lower down payments and more flexible credit score expectations.

Conventional loans are more expensive, with higher interest rates and fees. Yet, they offer more flexibility regarding the type of property you can purchase and the terms. Below is a table summarizing the differences:

Conventional Loan Mortgage Rates | Wesley Mortgage

Conventional Loans Compared to VA Loans

VA loans are available to veterans and active-duty military personnel. The Department of Veterans Affairs funds VA loans, and they have more lenient eligibility requirements. They also do not request a down payment. Below is a table comparing the features:

Conventional Loans Compared to USDA Loans

The United States Department of Agriculture offers USDA loans. Conventional loans offer more flexibility regarding the types of properties that can be purchased. USDA loans are only available for properties in rural areas. Below is a table that summarizes the key differences:

The Pros and Cons of a Conventional Mortgage

Pros:

  • Lower down payment requirements than government-insured loans
  • Easier to qualify for than government-insured loans
  • Available for a wider range of property types
  • No upfront mortgage insurance premiums (MIP) with a down payment of 20% or more
  • More flexible terms and conditions than government-insured loans

Cons:

  • Higher interest rates than government-insured loans
  • May require private mortgage insurance (PMI) if you put down less than 20%
  • More stringent eligibility requirements
  • May have higher closing costs than government-insured loans

Here are some extra tips to consider when choosing between a conventional mortgage and a government-insured loan:

  • The down payment amount
  • Your credit score
  • Your income
  • Your debt-to-income ratio
  • The type of property you want to buy
  • Your state of residence

In Conclusion

Many factors go into qualifying for a conventional loan. Understanding them and taking steps to improve your credit score, debt-to-income ratio, and down payment can increase your chances of getting approved.

If you have questions or need help getting started, contact one of our qualified loan officers at Wesley Mortgage. They will walk you through the process and find the best loan for your needs.

Thank you for reading!

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