Part 3D Part 3: Conventional Loans

Part 3D III – Conventional Loans

Conventional loans are the loan-type you most likely already know the most about. This is the standard loan program, with requirements that change every year in accordance to Fannie Mae and Freddie Mac mortgage guidelines. Conventional loans have a bit more freedom in regards to asset documentation and what’s needed for documenting income than USDA and FHA programs, but this program also has a higher down payment requirement and higher credit scores are considerably more important for being approved. Going conventional, in comparison to FHA, means you can forego the mortgage insurance with a high enough down payment, or opt to go through private mortgage insurance instead of FHA. Conventional Loans will only work with applicants who have a credit score of 620 or higher, with a higher favor towards those in the 740+ range. At the lower spectrum, it would be difficult to be approved for a home, but it can be done. Lower credit score applications are subject to a “Loan Level Price Adjustment” which basically adds a fee based on borrower-risk. Be aware that Conventional Loans and Private Mortgage Insurance are both very credit sensitive.

Conventional has a 5% minimum down-payment requirement for first-time buyers, (3% if not a first-time buyer) with 10% being the “standard” practice. Like with credit scores 740+ or higher, the borrower will be more favorable with a higher down-payment. As mentioned before, if the down-payment is high enough, a mortgage insurance may be waived. According to guidelines, the minimum down-payment that allows mortgage insurance to be waived needs to be 20%. Your mortgage payments will directly be influenced by your down-payment, and your credit score. If the borrower is buying a second residence, the down payment requirement jumps to 10%. This number can increase upwards to 20% for a minimum the more residences you are looking to purchase while still having other residences.

• Pros
  • Borrowers with great credit (740+) taking advantage of Conventional Loans will benefit by having a lower premium for mortgage insurance
  • Unlike with FHA, the Private Mortgage Insurance does not last the entire life of the loan, and can potentially be waived with a 20% or higher down-payment altogether.
  • A current home-owner can purchase as many homes as they wish, provided they can fulfill the down-payment requirements.
• Cons
  • Lower credit scores will be penalized by additional fees called Loan Level Price Adjustments.
  • First-time Home buyers have a 5% minimum down payment.
  • With additional residences, the required down-payment increases upwards towards 20%, with 10% being the minimum requirement for the second home