If you are planning on buying a new home at some point in the near future, there is a good chance that you are going to need a home loan. One of your loan options may be a conventional mortgage. A home could be the most valuable investment you ever make. The way you finance that investment is also very important. If you are considering a conventional mortgage, understanding your home loan options can place you in a position to be successful in yuor home purchase financing. Learn more about a conventional mortgage below!
What Is Meant by a Conventional Mortgage?
A conventional mortgage is not backed, guaranteed, or insured by the federal government. They often come from a private lender. The vast majority of conventional mortgages conform to the requirements that have been put in place by regulatory authorities, such as Fannie Mae and Freddie Mac. On the other hand, not all conventional mortgages meet these standards. Because there are different types of conventional mortgages, it is important for you to understand the differences. That way, you can find the one that is right for you.
The Requirements of a Conventional Mortgage
You need to make sure that you meet the requirements of a conventional mortgage if you are applying for a home loan. Some of the key points that you should keep in mind include:
- The Down Payment: A down payment is the portion of the price of the home that you pay upfront. The larger the down payment, the lower your home loan is going to be. By putting more money down, you may also be able to get a lower interest rate on your loan. Furthermore, if you are buying a home for the first time, you may be asked to put more money down. A good rule of thumb is to try to put ten to twenty percent down; however, you may be able to get a home loan for as little as three percent down.
- Private Mortgage Insurance: If you are not able to put enough money down, there is a chance that your lender may require that your mortgage payments include private mortgage insurance, which is usually shortened to PMI. Private Mortgage Insurance (PMI) is an insurance policy that protects your lender in case you default on your loan and are unable to pay it back. PMI is going to be added to your monthly payment. PMI usually will be waived once you have 20 percent equity in your home.
- Credit Score: You should check your credit score before you apply for a conventional mortgage. In general, you are going to need a credit score of at least 620 in order to qualify for a conventional loan. Major credit bureaus are required to give you one credit report for free every year. Make sure that you can correct any inaccuracies on your report before you apply for a loan.
- Debt to Income Ratio: Your lender is also going to look at your debt to income ratio. This is a representation of how much of your monthly income goes toward your debt. If your debt to income ratio is too high, you might be denied a home loan. Therefore, try to pay down as much of your debt as possible before applying for a home loan. In general, your debt to income ratio will have to be below 50 percent in order to qualify for a conventional home loan.
These are a few of the requirements that you will need to meet in order to qualify for a conventional home loan.
The Interest Rate on a Conventional Loan
You will want to take a close look at the interest rate on your conventional loan. The lower the interest rate, the lower your monthly payment is going to be. Also, this means that you will pay less money over the life of the loan. Interest rates will change daily but conventional mortgage rates are usually a little bit lower than an FHA loan and a little bit higher than a VA loan. The better your financial situation, the lower your interest rate is going to be.
Consider a Conventional Loan
A conventional loan usually has lower costs than other loan types. On the other hand, the requirements of a conventional loan may make this a bit harder to qualify for.