Conventional Loan Credit Score Requirements And Guidelines
Conventional Loan Credit Score Requirements And Guidelines
This BLOG On Conventional Loan Credit Score Requirements And Guidelines UPDATED On January 3rd, 2019 By Michael Gracz of Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322
So, you’ve decided to buy your own home? Do you have enough funds to support this big decision of your life?
The most important thing to have when it comes to buying a house is the right amount of money. While you may have a lot of money, but paying cash upfront, and that too in such a large amount, is not easy for anyone. Thus, most of us turn our way towards money lending institutions that offer their money to make the payment in terms of loan. This loan to be paid back to the lender on the terms decided by the two parties mutually.
Conventional loan is the most common and the most popular form of home loan for the people who have a good credit score. The people with a poor or bad credit score usually rely on FHA for their mortgage loan.
When it comes to home loans, one of the main things that are considered by the lending authority is your credit score. In fact, it is the most important things of all. A person with a good credit score is considered better than a person with a bad credit score. They don’t want to risk their money by lending it to someone who might not be able to pay them back. This is especially important when it comes to conventional loans as they are not insured by any government authority.
Thus, if you are planning to apply for conventional loan it is important to have a good credit score, otherwise you will not be considered eligible to apply for the loan.
Conventional Loan – What is it?
A conventional loan is a loan that is not formally backed or insured by any government authority such as the USDA, the VA or the FHA. It is a loan that follows the guidelines set by lending agencies Freddie Mae and Fannie Mac. These are lending agencies that have helped in standardizing the institution of mortgage lending in the U.S.
Today, conventional loans account for more than half of all the home loans applied for in the U.S. People with a good credit score turn to these conventional lending institutions for their money when they are buying a house.
If you are considering getting conventional loan, here are some things to keep in mind:
- A conventional loan is the best for first-time borrowers who have some amount of down payment and a decent credit score
- The minimum accepted credit score for most of the conventional loans is 620.
- The amount of down payment the borrower is willing to make determines the final loan cost and the interest rate
- When it comes to conventional loans, a 20% down payment requirement is not a requirement. In fact, a number of conventional loans can come with as low as 3% down payment
- If you are making less than 20% down payment on a conventional loan, you must have a private mortgage insurance
Conventional loans are growing in popularity owing to their ever-increasing flexibility guidelines and the low rates. Also known as conforming loans, these loans conform to the guidelines set by Fannie Mae and Freddie Mac.
Are Conventional Loans Undesirable due to the Lack of Government Backing?
Hardly! In fact, most of the first-time home buyers prefer getting money from these conventional lending institutions if they have a good credit score and can afford making s down payment. It is just a myth that you need to have 20% down payment to secure a conventional loan. There are many low down payment options when it comes to conventional loans. These include:
- Piggyback loan that needs 10% down payment
- HomeReadyTM and Conventional 97 loan with 3% down payment
Low down payment options in conventional lending industry not only exist but are also highly popular among buyers these days.
How To Apply For Conventional Loans?
Wondering how do you qualify for conventional loans? It is simple. You just need to match the expectations set forth by Fannie Mae and Freddie Mac and you will be able to get a loan for your home easily. There is a reputation surrounding conventional loans that they are very hard to qualify for. This is not the case in reality.
The elements of approval for conventional loans are the same as with the government backed loans. You need to prove that your income is expected to continue, you have enough money and assets to cover the down payment and an adequate credit history.
While the requirements are the same, lenders do set a higher bar for the applicants when they are applying for conventional loans as these are not insured by the government. Thus, the lending authorities need to make sure to take all the precautionary measures when it comes to their money. These loans do not come with a guarantee that the government will pay the money in case the borrower defaults. This makes them high risk loans for the lender and thus come with high standards.
However, conventional loan qualification is not much difficult for an average home-buyer. Here are the important things that are considered by the lender when they are scrutinizing the applicant for the loan.
As per Ellie Mae, a loan software company, the average credit score for the applicants that complete a mortgage successfully is 720. This is a pretty high number to get approved for a conventional loan. When it comes to conventional loans, the minimum credit score that you need to apply for them is 620. The lenders want to know that the people applying for the loan pays their bills on time, are good at money management and are financially disciplined. If you have a lower credit score than 620, you can apply for FHA loans that require a lower credit score limit. The FHA doesn’t charge a higher rate or an extra fee for lower credit scores.
Credit score is not the only consideration when it comes to getting approved for a conventional loan. Another important thing is to prove a continuous source of income. As an applicant, you will have to provide proof of your earnings that include but are not limited to the following documents.
- 2 year’s W2s
- 2 year’s tax returns if self-employed
- 30 day’s pay stubs
- Proof of education for new graduates
- An offer letter, if not yet started
Most of the lenders require a two-year documentation of your income that shows a consistent earning stream. Alimony or maintenance may also be counted in case of a divorce decree, as well as recurrent source of income such as automatic deposits. If you have a seasonal income, it can also be counted when it comes to conventional loans with a tax return as a proof.
The maximum loan amount offered by a lender is based on the appraised value of the property. However, value isn’t the only thing that is considered when closing the deal on a conventional loan. If there are some faults in the house, such as leaky faucets or water stains, a plumbing inspection might be requested. Improvements in the house may be needed which will delay the closing of the loan.
However, when it comes to conventional loans, the appraisal and property requirements are far less strict than the ones in FHA, USDA or VA loans. This is also an advantage as you can qualify for a home that is in a slightly worse condition and you can make the needed repairs once the loan is approved and you’ve moved into the house.
You will need a mortgage insurance for any conventional loans that has a down payment of less than 20%. The rates of Private Mortgage Insurance vary considerably based on the down payment and the credit score. If you have low credit score, you will have to get a high rate of mortgage insurance. This prompts many buyers to opt for FHA loans instead. FHA loans do not charge high mortgage insurance rates even for the applicants that have a low credit score.
The PMI company is usually chosen by your lender, but you do have a say in it. Since all the insurers do not charge the same rate, you can ask your lender to try someone else if you know they offer a lower interest rate. Ask your lenders if another PMI company works for them and then proceed accordingly.
When it comes to conventional loans, the nationwide loan limit is $453,100. It goes higher in many other locations. If you are looking for a loan amount greater than this, you should check your local conventional loan limit for your area.
Conventional lenders want to make sure they are only lending money to the people with a stable work history. You will not only be checked by your lender for your pay stubs, but they will also call your employer to check your salary and whether or not you are still employed at their organization. The lenders will also contact your previous employer if you have recently switched your job. If you are self-employed, you will have to provide paperwork to prove a sustainable business and income.
Who Should Go for Conventional Loan?
As mentioned before, applicants with a solid credit history and a great financial footing are the ones who qualify for conventional mortgage loan. The ideal candidate for conventional loans include:
- A credit score of at least 680
- Above 700 credit score is preferred, and it increases your chances of getting a lower interest rate on the loan
- The best interest rates are reserved for the applicants with over 740 credit score
- A debt income ratio of around 36% is considered ideal for conventional loans
- If you are applying for conventional loans, your debt income ratio must not be above 43%
- Can pay at least 20% of the price of the home out of pocket
- If you are not able to do so, you will need to have a private mortgage insurance to make your case strong
Who Is A Conventional Loan Not Suitable for?
Generally, conventional loan is not suitable for the people who are just starting out in life. They are also not suitable for the ones who have more than normal debt on them or have a modest credit rating. Applying for and getting approved for conventional mortgage loan will be difficult for you in this case. getting approved for conventional mortgage will also be difficult for the people who have:
- Suffered foreclosure or bankruptcy in the last seven years
- A credit score of less than 680
- Not enough money to make a down payment of at least 10%
- Debt to income ratio of over 43%
If you have a credit score of less than 620, you can try to improve your score as much as you can before you apply for a conventional home loan. Your chances of getting loan approval improve drastically if you have a better credit score. Have a lot of pending debt? A debt consolidation program can help you pay off your debt at a much lower interest rate and quicker than before. Here are some tips that can help you improve your credit score for mortgage loan:
- Don’t miss any loan or credit card payments
- Pay down the balance on your credit cards as soon as possible
- Dispute negative information
- Get a secured credit card
- Contact creditors and ask them to delete collection accounts if you have paid them
- Don’t have a lot of credit inquiries
The Final Word On Conventional Loan Credit Score Requirements
It is very important for home buyers to not just pick one lender when they are shopping for a conventional home loan. Take quotes from at least three lenders and choose the one who is the best for you when it comes to the terms and conditions of the conventional mortgage loan.
If you have been denied a home loan or have any questions about real estate or mortgage please contact the author Michael Gracz of Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322 at 630-659-7644 or text us for faster response. Or email Michael at firstname.lastname@example.org. The Gustan Cho Team at Loan Cabin Inc. works when you work, so feel free to contact him any time.
This BLOG On Conventional Loan Credit Score Requirements And Guidelines Was UPDATED On January 3rd, 2019