The Requirements, Dos and Don’ts of Conventional Loans
It’s a dream of every individual to own a home. When out shopping for a new home, dreams of gorgeous kitchens, closet space galore and elegant baths may linger in your head, but the most important leap called financing must not escape your mind. In numerous respects, financing a home is as simple as acquiring a mortgage. But mortgage acquisition comes with stringent requirements like providing collateral which you may not have at the moment. Luckily for you, there are conventional loans that you can leverage to finance your home acquisition.
What is a conventional loan? A conventional loan is basically a mortgage that is not backed or insured by the central government or government agency for that matter, for instance, the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the United States Department of Agriculture (USDA). However, conventional loans have to follow the guidelines of Government Sponsored Enterprises (GSEs). Examples of Government Sponsored Enterprises include Freddie Mac and Fannie Mae. Conventional Loans can further be broken down to conforming and non-conforming loans. Conforming loans abide by the terms and conditions laid down by Freddie Mac and Fannie Mae. On the other hand, non-conforming loans don’t conform to Freddie Mac and Fannie Mae guidelines but are equally considered conventional. Like any other loan, there are conventional loan requirements to qualify for:
1. Credit History
Most creditors or lenders subscribe to Freddie Mac and Fannie Mae guidelines when offering credit. A minimum credit score of at least 620 is needed for a borrower to be eligible for a fixed interest rate. A non-adjustable rate requires a score of at least 640.
To qualify for a conforming loan, the borrower must present authentic and accurate documents pertaining to work history, assets, and income.
3. Loan-to-Value Ratio (LTV)
A minimum of 5% down payment deposit is required for a borrower to qualify for conventional loans. The source of the down payment can be borrower’s own savings, down payment assistance programs or family contribution.
4. Debt portfolio
A debt portfolio must be presented to the lender duly. If a borrower’s debt portfolio is huge, he may find difficulties acquiring conventional loans.
5. Debt-to-Income Ratio (DTI)
A debt-to-income ratio of at least 455 is required for most borrowers to quality for conventional loans. However, a 50% ratio can be considered but with powerful compensation factors like remarkable credit history, anticipated salary increment with physical proof and huge amounts of liquid savings.
Things to avoid before applying for conventional loans
- Avoid Taking out Other Loans or Credit Lines
Student, personal and auto loans can harm your chances of qualifying for conventional loans because they drastically increase your debt-to-income ratio. When you are considering applying for conventional loans in the future, avoid taking up other loans or credit lines.
- Avoid Blowing Your Savings
You are bound to experience out-of –pocket costs when using conventional loans to buy your house. The first consideration is always the down payment which is normally in the region of 3.5 to 5%. You will also consider the closing costs. Conventional lenders will demand to see extra cash reserves in your bank account particularly if they view you as a high-risk recipient. To elevate your chances of securing conventional loans, you must save as much as possible by avoiding large expenditures that deplete your cash reserves.
- Avoid Taking Leaves of Absence or Shifting Jobs
Conventional loan lenders want to see a steady work history and income and on numerous occasions, they need at least 2 years of steady employment. Making major career changes or taking many leaves of absence may torpedo your chances of securing conventional loans, so stop it. As far as employment is concern, the best course of action before applying for the loan is to maintain the status quo.
- Avoid Missing Credit Card Payments
Conventional loan lenders keep tabs on your credit score when considering giving out loans. A lower credit score is indicative of a higher risk for the lender, and it’s frowned upon. So you want to avoid defaulting on your credit card payments if you are contemplating applying for conventional loans in the future.
Before applying for conventional loans, make sure you do the following:
- Halt all Forms of Financing
Other forms of financing like personal and automobile loans must be halted until you’ve closed on the home. Over-extending on these financing may endanger your chances of winning a conventional loan
- Try to Limit Credit Card Use
Only use your credit card as a last resort to avoid the risk of affecting your credit score.
- Ensure Prompt Payment of Bills
Make sure all your bills are paid on time especially those reflecting on your credit report. Just one default in the payment of bills can torpedo your chances of getting a conventional loan if it finds its way into your credit report.
- Keep Aspect of Your Employment Steady
Avoid switching jobs until your conventional loan comes through. The only exception should be when the next job has a higher remuneration that could considerably increase your chances of getting the loan
Bottom-line: Although conventional loans are losing a significant share in today’s volatile market, they still dominate the mortgage lending domain. This means that it is easier to acquire conventional loans these days than in the past. The best financial management practices will significantly improve your chances of acquiring conventional loans. After acquiring the loan, a higher level of financial discipline is required to ensure you repay the loan without glitches. By adhering to these guidelines, your journey to owning a home will come sooner rather than later.