Conventional Loan Requirements
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Conventional Loan Types
Conventional loans can be conforming or non-conforming. The most common types of conventional loans include the following:
Fixed-rate mortgage
Fixed-rate mortgage loans are one of the most common loan types because they’re transparent and easy to understand. These mortgages can either be conforming or non-conforming, but the interest rate will remain the same throughout the life of the loan.
Adjustable-rate mortgage
An adjustable-rate mortgage (ARM) is an alternative option typically used when borrowers want to save money during the first portion of their loan. With ARMs, you can expect a lower interest rate during the introductory period of 3, 5, or 7 years. After the introductory period ends, your mortgage rate will fluctuate annually based on market conditions.
Jumbo loan
Jumbo loans are non-conforming conventional loans, meaning they don’t meet Fannie Mae’s or Freddie Mac’s standards. The only difference between a jumbo loan and a standard conventional loan is the loan limit, or how much you’re allowed to borrow.
limits are dependent on location, with higher limits in areas with higher costs of living. If you must exceed those limits to purchase a property, you may need a jumbo loan that exceeds conforming conventional loan limits.
Investment property loan
Investment property loans are also considered conventional loans because they’re not backed by the federal government and don’t require you to use the loan for primary residences only. Instead, you can purchase just about any property with a conventional loan, whether you plan to live in it or not.
Investment property loans are typically fixed-rate mortgages that come with higher interest rates because they’re higher-risk investments.
Conventional Loan Requirements
Most of the time, when we’re talking about conventional loans, we’re talking about conforming loans that adhere to the guidelines to be sold on the secondary mortgage market. As such, these loans have stricter requirements for borrowers, making them potentially more challenging to secure. When determining eligibility for a conventional loan, lenders review the following criteria:
Credit score
Conventional loan credit score requirements are often stricter than non-conventional loans. In most cases, lenders want to see a credit score of at least 620, Fannie Mae and Freddie Mac’s minimum requirement. Unlike non-conventional loans, there’s no flexibility. You won’t qualify for the loan without a score of at least 620.
Keep in mind that 620 is just Fannie Mae and Freddie Mac’s requirement. Your lender may require an even higher score to qualify.
In any case, a higher credit score can help you get better terms. Typically, the higher the credit score, the lower the interest rate, which can help you save thousands of dollars over the life of the loan and when it comes time to pay your monthly mortgage bill.
We accept lower credit scores.
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Down payment
There are benefits to making a down payment of 20% when using a conventional loan, but it’s not absolutely necessary. Fannie Mae and Freddie Mac only require a down payment of 3%. However, when you put down less than 20%, you’ll need to pay private mortgage insurance (PMI), which can drastically increase your monthly payments.
In addition, not everyone qualifies for a 3% down payment. To qualify for the lowest minimum down payment, one of the borrowers must be a first-time buyer. Otherwise, you’ll need to make no more than 80% of the median income in your area for a down payment of 5%.
Conventional loan down payment requirements also vary by property type. For instance, if the property has more than one unit or is a second home, you may need a higher down payment.
The more you put down, the more you can potentially save in the long run because it reduces the loan amount. With a lower loan amount, you’ll pay less in interest over the life of the loan, and most lenders will give you a more competitive interest rate because you’re not borrowing as much.
DTI ratio
Your DTI represents the percentage of gross monthly income that goes toward paying your monthly debts. Most lenders like to see a DTI of no more than 50%, with 43% or lower being ideal. However, DTI requirements vary by lender, with some having more flexible requirements than others. For instance, you may be able to qualify with a higher DTI if you make a larger down payment or have a high credit score.
You should calculate your DTI before contacting a lender to ensure you meet the eligibility requirements for conventional loans. To find DTI, divide your monthly debts by your gross monthly income and multiply the decimal by 100 to get a percentage.
The lower your DTI, the more likely you are to be approved for a conventional mortgage loan because it tells lenders that you manage your debt well and have very little debt that can compromise your ability to pay your mortgage.
Loan limits
Conventional loan limits vary by county, with higher loan limits available in areas with higher costs of living and more competitive real estate markets. If you need a loan that exceeds those limits, you may still qualify for a jumbo loan. Since jumbo loans are non-conforming, the requirements are set by the lender.
On the other hand, if your loan amount falls within conforming limits, the requirements are set by Fannie Mae and Freddie Mac. You can find loan limits on the Federal Housing Finance Agency (FHFA) website.
In order to secure a conventional conforming mortgage, your loan amount must not exceed the limit. If it does, you won’t qualify for the loan at all.
Is It Hard to Get Approved for a Conventional Loan?
It can be harder to qualify for a conventional loan than some other loan types, but it largely depends on your unique circumstance. In most cases, borrowers will need a fair or better credit score and be able to prove stable employment and income. In addition, these requirements are stringent because they’re mandated by Fannie Mae (FNMA) and Freddie Mac (FHLMC), meaning there’s absolutely no flexibility.
Compared to government-backed loans, conventional loans may be harder to qualify for, but it mainly depends on your borrower profile. Not everyone qualifies for a FHA, USDA, or VA loan. Even if you do qualify for those loans, they have strict location and property requirements the property itself might not meet. Therefore, neither conventional or non-conventional loans are harder to qualify for because they’re each designed for a particular type of borrower.
In general, as long as you have a credit score of 620 and can prove your ability to repay the loan, getting approved for a conventional loan isn’t as challenging as it may seem. Lenders can determine your ability to repay using traditional or alternative methods. For instance, we can use everything from pay stubs and W-2s to bank statements and tax returns to ensure you earn enough to repay the loan on a monthly basis.
To apply for a conventional loan with Griffin Funding, all you have to do is contact us or complete our online application. The general process of working with Griffin Funding looks like this:
Discovery: Our mortgage experts prefer to meet with you in person or remotely to discuss your unique financial situation and help you determine whether a conventional loan is right for you.
Pre-approval: Once you’ve determined whether a conventional loan is the right mortgage program, you can apply for pre-approval to give you a starting point and set expectations for how much you may qualify to borrow. A pre-approval doesn’t guarantee the loan, but it can help during house hunting by helping you shop within your budget while ensuring you have a competitive edge.
Loan application: Once you’ve made an offer on a property, you can complete the full loan application either online or over the phone. We’ll provide you with a checklist for the types of documentation we need to ensure you meet the conventional loan requirements.
Underwriting: During the underwriting process, we review your information and documents to determine whether you’re eligible for a conventional loan while setting the loan amount and interest rate. We’ll also order an appraisal to ensure you’re paying the right price for the property.
Approval: Once your loan is approved, we’ll schedule the closing and fund your loan.
This is the same process we use for all of our mortgage offerings, whether you’re choosing a government-backed, traditional, or Non-QM loan.
Of course, whether or not it’s more challenging to get a conventional loan depends on your unique financial situation. If, for some reason, we determine a conventional loan is not the right fit for you, you may still qualify for another type of mortgage loan.
See If You Meet the Requirements for a Conventional Loan
Conventional loans are common and popular because they’re straightforward and offer benefits like competitive interest rates, streamlined approval, and down payment flexibility. However, they still have more stringent requirements than non-conventional loans.
Unfortunately, not everyone will qualify for a government-backed loan. But there are still options. Griffin Funding is a premier mortgage lender that can help you find the best mortgage loan based on your unique situation. Contact Griffin Funding to learn more about our mortgage programs.
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Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 23 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc.
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