When thinking about Conventional Loan With Low Credit Scores you need to first know the background with the mortgage industry and the types of loan programs that are available. There are the loans that are government insured like FHA, VA, and USDA and most everything else will fall under the conventional or conforming loan. Conventional Loans differ from their government insured counterparts in the sense that they are extremely credit sensitive so the better your credit score is, the better your interest rate will be and vice versa. If you plan on getting a conventional loan with the minimum requirements on credit score, be prepared to pay the higher interest rates because of this. In contrast since the other loans like FHA, VA, and USDA are government backed or insured so they can drive lower interest rates since they are insured against default or foreclosure of potential borrowers so lenders will be made whole should a borrower default. For example FHA Loans have extremely low interest rates and because of this, this is why this is the most popular mortgage loan program in the United States. The reason why these rates are so low is due to the fact that the Federal Housing Administration guarantees FHA mortgage lenders in the event a borrower defaults on the loan.
As a contrast to FHA and government insured mortgage loans, Conventional Loans aren’t insured or guaranteed by the government and it shows. Conventional Loan mortgage lenders typically want as much down payment from borrowers as possible and are ultimately shooting for a 20% down payment on their home purchase. It is possible to put the minimum down payment of 5% or even 3% for first-time home buyers but keep in mind that if you are getting a conventional loan and you are not putting at least 20% down private mortgage insurance or PMI is required by the lender. Private mortgage insurance is paid for by the borrower for the benefit of the mortgage lender in the case that default happens.
With regards to Conventional Loans, the minimum FICO credit score that can be used is 620. In theory you can get an approval for a low credit score, but compared to FHA Loans where you can go as low as 500 FICO, Conventional Loans require a minimum score of 120 points higher. If you have a FICO credit score under 620 and are looking for a conventional loan you will have your application denied due to insufficient FICO credit score. Aside from obtaining a 620 FICO credit score, there are other minimum requirements needed to be obtained in order to get a loan approval. With regards to debt to income ratio, it is capped at 45% meaning your monthly debt obligations with your new house payment can only be 45% of your monthly gross income. If you had a previous Chapter 7 Bankruptcy there is a mandatory 4 year waiting period after the discharge date of the bankruptcy. If you had a Chapter 13 Bankruptcy, the mandatory waiting period is 2 years after the discharge date. If you had a short sale or deed in lieu of foreclosure the waiting period is 4 years and if you had a foreclosure, the waiting period is 7 years. If your goal is to obtain the best Conventional Loan rate possible then you are going to need a 740 FICO score and at least 20% down payment. Without this, your interest rate will be higher the worse your qualifications are.
If you need help with a Conventional Loan pre-approval and loan then you are in the right place. Please feel free to reach out to me any time and we can get the ball rolling on your new home. Please call me at 888-900-1020, email me at firstname.lastname@example.org, and visit www.loanconsultants.org.