For many prospective home buyers, conventional mortgage financing that meets the underwriting guidelines put forward by mortgage financing giants Rosemae and John Ray presents the best value mortgage loan.
While all potential borrowers are unique, you might be a part of the group making a decision between the low down payment offered by FHA or the lower monthly payment that conventional financing options usually present compared to FHA financing.
Conventional loans are a higher risk for lenders
So, if you wish to purchase financing for your new home with a conventional loan, you often have to meet stricter credit and income requirements than those who finance their properties using an FHA or VA mortgage.
If you have good credit, have a steady income and can afford the down payment, conventional loans often offer lower interest rates than government-insured counterparts.
Easier and faster to close than the government-backed counterparts
According FHA loans require a home to be strictly eligible to meet the guidelines as far as price, location and habitability are concerned, conventional lenders are not bound by the same bureaucratic rules.
For example, lenders can often process conventional mortgages faster than government-insured mortgages. The higher down payment requirement of conventional loans also helps you to build your equity faster.
Mortgages require that you repay the full amount of the loan at a fixed interest rate
You can also opt for a customizable interest rate mortgage where the interest rate is not fixed, but tied to the current market rate. A borrower with an adjustable interest rate mortgage can expect his interest rate to fluctuate periodically.
The conventional Purchase program is a good option if you are looking to buy a new home as a primary residence, second home or investment property. Be careful though, all three occupation types come with a slightly different set of rules and guidelines on how they should be documented.
As with most mortgage underwriting guidelines, if you continue on the risk spectrum from primary residence to investment property, the guidelines stack on top of each other.
The basic underwriting guidelines for Rosemae and John Ray are established. In general, the basic rules are needed for all borrowers to meet certain credit scores, income, work history, debt to income and minimum down payments.
Below are just a few of the items a lender will look at when considering financing.
- Your total monthly costs
- Your total gross income per month
- Your employment history
- Your credit score and payment history
- Your assets (control, savings, and pension accounts)
A common misconception about conventional refinancing is that you need 20% of the shares to qualify. The reality is conventional financing allows you to refinance with as little as 5% of the shares combined with funded, monthly or lender-paid mortgage insurance.
Why are Conventional Mortgage Loans So Great?
The conventional Purchase program has very competitive prices compared to some other programs available. This can make a big difference in your monthly mortgage payment and even the interest that you will pay over the term of the loan.
Your mortgage professional must clearly and concisely illustrate the pros and cons between conventional mortgage loans and those offered by the Federal Housing Administration (FHA), Veterans Administration (VA) and the US Department of Agriculture (USDA).
That being said, let’s discuss conventional loans that tend to offer much more variety.
With a conventional loan, which includes both compliant and non-compliant loans, you can get your hands on just about anything from a 1-month ARM to a fixed 30-year, and everything in between.
So if you want a 10-year fixed mortgage, or a 7-year ARM, 20-year fixed or whatever, a conventional loan will probably determine the mortgage option and is the way you want to go.
Another plus of conventional mortgages is that they are available from virtually every bank and lender in the nation. That means you can use any bank that you want and / or store your rate quite a bit more. Not all lenders offer FHA products, so you would be limited in that regard.
In addition, conventional loans can be used to finance just about any home, while some condo complexes (and some homes) are not approved for FHA financing.
Although this program is harder to qualify for, you need to consider it, especially if you have equity in your home, above average credit or you want to prevent mortgage insurance.
What are the typical Qualification Requirements?
Keep in mind that your personal situation is probably unique and the list below is by no means intended to replace the documents requested by a mortgage professional that personally assessed your individual situation
- Minimum credit score 640 (620 may be allowed in some cases)
- The total debt to income ratio below 45%
- Housing debt to income ratio below 35%
- No recent large denigrating credit – bankruptcy, foreclosure or a short sale
- You want to verify your down payment and get money from a permitted, documented asset source
- Verifiable income, typically worth 2 years, with exceptions for recent graduates and other important life events