Among many other types of Polar Mortgages Just Products mortgages, a conventional mortgage can be the toughest to qualify. Its strict requirements are largely due to it not being backed by the federal government, but it’s what most lenders can readily offer. All in all, conventional mortgages take up 64% of all home loans.
The key to qualifying in a conventional mortgage is to have solid credit and considerable down payment, but it remains to be the most difficult type of mortgage to qualify for. It has the highest minimum credit score required among all the other types of home loans —640. It’s available for those who want to buy a home for their primary or secondary residence, as well as for investment.
Two Types of Conventional Loan
There are two types of conventional mortgages—conforming and non-conforming loans. The conforming loan refers to those that meet the requirement or maximum restrictions as per government-sponsored enterprises (GSEs)—Freddie Mac and Fannie Mae.
Both of them purchase mortgages from lenders, which they then sell to investors. This way, lenders don’t have to wait for thirty years so they can obtain the loan’s full amount.
There are no fixed loan limits for a conforming conventional loan since it changes every year and it varies by state. The limit was $510,400 in 2020 while it’s $548,250 in 2021 in most states.
On the other hand, non-conforming loans do not conform to the lending standards set by Freddie Mac or Fannie Mae and are specially intended for borrowers that have high net worth and income. For this type of loan, lenders have all the freedom to set their own limits, which depends on the financial situation of the borrower.
The most common type of non-conforming loan is a jumbo loan that can even reach up to $1 million to $2 million. With huge amounts at risk, lenders don’t sell homes more quickly than the conforming mortgage type. Consequently, the lenders would have to hold the loans much longer, assume more risks, and offer higher interest rates.
Jumbo mortgages are the most common non-conforming loan, going above the maximum limit, which is why they’ll require borrowers to have a higher down payment, a higher minimum credit score requirement, and a much lower debt to income (DTI) ratio.
How This Type of Mortgage Works
With a conventional mortgage, it can be a very slow process with lots of documentation and paperwork that borrowers will need to comply with first. The steps are relatively simple.
Like all types of home loans, you’ll need to apply for the mortgage, work with your trusted mortgage loan officer, comply with all the requirements, and prepare all the payments. Then, you can close after getting your loan approved.
How Much Are the Down Payments?
The down payment will depend on the borrowers’ type of property or loan and personal situation. First-time homebuyers can get a very low down payment, even up to less than 3%.
For those that aren’t first-time homebuyers or are getting less than 80% of your area’s median income, the required down payment would be 5%. The down payment required for those that buy a second home would be 10%.
You will have to pay a down of 15% if you’re buying a home other than a single-family home with several units. While for an adjustable-rate mortgage, you’ll have to put down 5%, and for fixed-rate loans, 3%. Finally, for jumbo loans, the down payment would be higher, ranging between 20% and 40%.
Paying for a Private Mortgage Insurance (PMI)?
If you pay less than a 20% down payment, you’re required to pay for private mortgage insurance, which is basically insurance premiums to protect your lender if ever you stop paying; hence, increasing your monthly payment overall.
To avoid having to pay for insurance, strive to pay a down of more than 20%. However, the mortgage insurance in a conventional loan can easily be removed or canceled once you reach an equity of 20%.
The Documents You Will Need When Applying for a Conventional Mortgage
You’ll need to secure your photo ID or driver’s license, tax returns for the previous two years, previous months’ pay stubs for W2 employees, a financial statement with your assets and liabilities, your credit report, documentation for how you’ll put the down payment, and an appraisal of your property on a lien.
Overall, just make sure you have solid savings and credit scores so you can qualify for a conventional mortgage. If you don’t, then you can always try applying for other types of home loans.