A conventional loan could be preferable for applicants with good credit scores, low debt-to-income ratio, and can put up the down payment. Being able to qualify for a conventional mortgage means you can show sufficient income to make the house payment and debt payments.
Lenders need to assess the risk factors for the loans that they underwrite. They don’t want to be stuck with REO or bank-owned properties. That’s why homebuyers who want conventional home loans need to show good credit history and funding sources.
Based on an applicant’s situation, conventional loan lenders issue conforming or nonconforming loans. Conforming simply means they follow the guidelines published by the Fannie Mae or Freddie Mac. These loans have limits that change annually based on the average house prices in a location.
Also known as jumbo loans, nonconforming loans increase the regular loan limits. Private lenders fund them. After assessing a borrower’s financial strength, these private lenders have the flexibility to approve a jumbo loan and underwrite the mortgage themselves. Loan limits vary significantly between metropolitan, resort, and rural areas.
These types of loans can be used to finance primary residences, second homes, and investment properties.
How to Prep for a Conventional Loan
A conventional lender will welcome your application if you prepare ahead of time. Take these preliminary steps to help yourself get the best interest rates and ensure a smooth application process:
- Pay down debt and do not incur more debt—for a car or anything else. Your total debt and house payments need to be under 35-50 percent of your income.
- Save up a down payment of 20 percent. This will cut out the expense of Private Mortgage Insurance.
- Decide your comfortability with monthly payments. Will loan payments max out your finances or take up too much of your discretionary income?
- Check your credit scores with all three agencies to be certain they are good to excellent. If not, pay special attention to paying bills on time and lock up your credit cards.
- Gather two years of income documentation. If you know of other future income in the pike, add this to your file.
- Ask the lender for a pre-approval letter. This can help you move quickly to make an offer on a home.
- Find out the price range of homes most suitable for your family.
- Begin your home search.
Advantages of Conventional Mortgages
Our Colorado mortgage officers will let you know how conventional loans can help buyers.
- Good interest rates
- Faster than government-backed loans
- Lower costs
- Flexibility to choose fixed-rate mortgages with guaranteed payments over 10 to 30 years or adjustable-rate mortgages
- Low down payments
- Ability to cancel PMI insurance after achieving 20 percent home equity
- Higher loan amounts for single family homes and more for multiple units
Qualifications for Conventional Loan Applicants
Would you qualify for a conventional home loan? Do you have exceptional credit and low debt?
To be considered for a conventional loan, be sure to:
- Get your credit scores into the good to excellent categories
- Be on your way to saving up a 20 percent down payment
- Keep your debt-to-income ratio under 35 percent
- Show consistent employment or income status
- Show sufficient income to make house and other payments
Conventional mortgages finance the vast proportion of Colorado real estate.