Also, if you’re searching for a mortgage, you have probably come across conventional loans. You might be wondering, what are the conventional loans requirements? What exactly is a conventional loan and how do you know if you can qualify for one or if it is the right loan for you?
In this post, we are going to discuss everything related to conventional loans with a focus on its requirements in 2019.
What Exactly is a Conventional Loan?
A conventional loan or conforming loan is a type of mortgage that is backed by a government agency in the U.S such as the Veterans Administration (VA) and Federal Housing Administration (FHA).
A conventional loan is also a mortgage that meets the lending requirements of Fannie Mae and Freddie Mac, the two biggest purchasers of mortgage loans in the country. Most of these loans are issued by private lenders who sell it to one of the GSE’s (Government Sponsored Entities).
What are the Requirements of Conventional Loans in 2019?
There are a number of requirements you must meet before you can get a conventional mortgage. These include credit history, property type you want to purchase, your occupancy and more. Here are the detailed requirements.
- Credit history. The minimum credit score required for a conventional loan in 2019 is between 620-640. This can change depending on the lender.
- Income. You calculate the income by reviewing your recent paycheck stubs, W2s, and tax returns. The debt-to-income ratio should not exceed 43% if you are to be eligible for a conventional loan.
- Occupancy. You acquire conventional loans to finance your primary residence, rental property, vacation property, or a second home as opposed to government-backed loans that can only be used to finance a primary residence.
- Assets. A lender will verify and review the bank and investment statements of the borrower to ensure that they have sufficient assets to close the deal. The funds should be able to at least cover a down payment and closing costs associated with the loan.
- Property type. Conventional loans can only be acquired to finance duplexes, single-family homes, condominiums, townhouses, and 2-4 unit properties.
What are Government-Backed Loans?
Private lenders give these loans and have government’s back. There is a guarantee by the Federal government with programs including VA or FHA.
As opposed to government-backed loans, conventional loans are never insured by the government, they are instead insured by private mortgage insurance companies.
Here are the government-backed loans available in 2019.
- VA loans. VA Loans are specifically available for veterans. They require no downpayment or mortgage insurance.
- USDA loans. The USDA loans were created by the Department of US Agriculture for people who fall in the low-to-median income homebuyers. The loans can be acquired to buy homes in rural areas of the U.S.
- FHA loans. The FHA loans are particularly popular and common because of their low credit score requirements (580). They also only have 3.5% downpayment requirements which makes them attractive to people.
Pros and Cons of Conventional Loans
Just like any other mortgage plans, conventional loans have their advantages and disadvantages. Here are some noteworthy ones.
Pros of Conventional Loans
- They have higher loan limits compared to FHA loan programs
- They do not have private mortgage insurance with 80% loan-to-value ratio
- The PMI is cancels, if the LTV reaches 78%.
- Fixed-rate loan terms and adjustable-rate are available
- You can use these loans to finance a second home and other investment properties
- They have lower PMI rates than FHA home loans
Cons of Conventional Loans
- The credit requirement for a conventional loan is higher than the FHA mortgage (620-640)
- The qualifying guidelines are the strictest
- They have higher down payment requirements (5%-20%)
- If you have low income, you may never be able to qualify
Is a Conventional Loan Good for You?
A conventional loan may only be good for you if..
- You have enough funds to manage 20% down payment
- You have a high income and low debt-to-income ratio
- Your minimum Fico credit score is 620
- If you want to avoid PMI by putting down 20% down payment
- In the need of a loan that gives you more limit than the FHA loan amount
What are the Loan Limits of Conventional Loans?
The conventional loan limit for low-cost areas in 2019 is $453,100
The conventional loan limit for high-cost areas in 2019 is $679,650
If you are eyeing a property in a specific area and wondering how much the loan limit is for that particular area, then you need to view the conforming loan limits in 2019 by the Federal Housing Finance Agency.
Conclusion
In the first place, if you can manage to pay a 20% down payment, then you’ll enjoy low-interest rates with conventional loans. Also, you will also avoid any mortgage insurance which will save you thousands of dollars every year.
However, with higher credit score requirements, the loan is difficult to acquire. Get in touch with a mortgage expert at Aceltis Financial Group and we’ll let you know exactly where you stand. We will even help you find a better deal.