Qualifications For A Conventional Mortgage Loan
What is a Conventional Mortgage Loan?
A conventional mortgage loan is a loan that is not insured by any government agency, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Agriculture Department (USDA). Instead, these loans are backed by private lenders and investors, which makes them a more attractive option for many borrowers. Conventional loans are typically used to purchase homes, but can also be used to refinance existing mortgages. To qualify for a conventional loan, borrowers must meet certain criteria.
Minimum Credit Score Requirements
The minimum credit score required to qualify for a conventional loan varies depending on the type of loan and the lender. Generally, a minimum credit score of 620 is required for most conventional loans. However, some lenders may require a higher credit score. If a borrower has a lower credit score, they may still qualify for a conventional mortgage loan, but may need to put down a larger down payment or pay a higher interest rate.
Income Requirements
In order to qualify for a conventional loan, borrowers must demonstrate that they have a stable income. Lenders will look at the borrower's debt-to-income ratio, which is the amount of debt they have compared to their income. In order to qualify, the borrower must have a debt-to-income ratio that is 43% or lower. This means that the borrower should have a total debt load (including housing costs) that is no more than 43% of their gross monthly income.
Employment and Residency Requirements
In order to qualify for a conventional loan, borrowers must have a steady employment history. Lenders will look at the borrower's employment history and require that they have been employed in the same field for at least two years. Additionally, borrowers must typically have a two-year history of living in the same residence in order to qualify.
Down Payment Requirements
The amount of money that a borrower must put down on a conventional loan depends on several factors, such as the type of loan and the credit score of the borrower. Typically, borrowers must put down a minimum of 5% of the purchase price of the home, although some lenders may require a higher down payment. Borrowers with a lower credit score may need to put down a larger down payment in order to qualify for a conventional loan.
Mortgage Insurance Requirements
Mortgage insurance is typically required for conventional loans with a down payment of less than 20%. This insurance helps protect the lender in the event that the borrower defaults on the loan. The cost of mortgage insurance varies depending on the amount of the loan and the size of the down payment. Typically, mortgage insurance premiums range from 0.5% to 1.5% of the loan amount.
Closing Costs
In addition to the down payment and mortgage insurance, borrowers must also pay closing costs when taking out a conventional loan. Closing costs can include appraisal fees, title insurance, and other administrative fees. These costs can vary depending on the lender and the type of loan, but typically range from 2% to 5% of the loan amount.
Conclusion
Qualifying for a conventional loan requires that borrowers meet certain criteria, such as minimum credit score requirements, income requirements, employment and residency requirements, and down payment and mortgage insurance requirements. Borrowers must also be prepared to pay closing costs when taking out a conventional loan. By understanding the qualifications for a conventional loan, potential borrowers can better prepare themselves for the loan application process.