Conventional Loans Mortgage Requirements
Conventional loans are guaranteed by Fannie Mae and Freddie Mac, which simply means that Fannie Mae and Freddie Mac guarantee to purchase the loan from the mortgage lender. This feature is what helped create the secondary mortgage market, which essentially makes it easier for banks to lend more money. Typically, with a conventional mortgage you will have more cash to work with and a higher credit score.
Getting an approval is always the first step for any loan. To see if the loan is conforming and qualifies for a conventional mortgage we process your application through an automated approval system: DU (or desktop underwriter) for Fannie Mae, or LP (or loan prospector) for Freddie Mac. Sometimes a lender won’t do the loan even with a DU approval. That is where Landmark has an advantage over a bank – if one of our underwriters won’t do a loan oftentimes another one will.
Conventional loans typically requires a minimum 620 middle score. Some niche lenders will go lower but for the most part you are going to need a 620 or higher. Obviously the higher the credit score the better interest rate you will receive. Find out what rate you qualify for by applying for online pre-approval now.
The minimum down payment is 3% for a conventional mortgage. Using conventional financing with that magical 20% down payment, eliminates your need for monthly mortgage insurance. With 3% down HomeReady or HomePossible programs, the entire down payment can be a gift. If you put down less you will be required to have mortgage insurance. With conventional mortgages it’s private mortgage insurance instead of government provided mortgage insurance. This mortgage insurance is different from your hazard insurance for fire and damage. This is insurance that is meant to cover the lender in case of default, called PMI. The annual PMI rate will vary based on the LTV and the client’s credit score. One key feature of the conventional loan is that even though you may have private mortgage insurance there is no funding fee or upfront mortgage insurance that needs to financed into the loan like with FHA, VA, or USDA financing.
All conventional loans require verification of income. If you receive a W2, typically 2 years of W2s and 4 weeks of paystubs will cover you. If you are self employed, you will be required to provide complete tax returns with all schedules. A conventional mortgage will be the most flexible when it comes to self employment income. If you can show that you have been self employed for at least 5 years, the underwriter may only require 1 year of self employed tax returns. Government backed loans (FHA and VA) are going to require a minimum of 2 years self employment.
If you are a landlord, you can use current rental income as well as income from new rentals with a signed lease and a cancelled check for rental deposit. An average will be used, and most likely the underwriter will only use 75% of the net rental income to account for a potential lack of occupancy. Find out if you qualify for a conventional loan now.
A seller concession is when the seller pays closing costs, or mortgage fees for the buyer. This is allowed on all conventional loans with some variations. If you are putting at least 10% down, then you can ask the seller to pay up to 6% of the sales price toward your closing costs, points and/or prepaid items. If you are putting down less than 10%, the maximum seller concession is 3%. On investment properties, it is 2% of the sales price. Seller concessions are a way that you can save on the money you are required to bring to closing. Make sure your realtor structures your offers accordingly and you don’t ask for more than you are allowed to receive!
You’re going to have a little more flexibility on the overall condition of a property with a conventional loan as compared to a government loan but the property still needs to be in working order.
An escrow hold back might be possible if the seller doesn’t want to make necessary repairs before closing. An escrow hold back is where a portion of the sales proceeds are held in escrow after closing, until the repairs are completed. The appraiser will then need to confirm that the work is finished in order for the escrow to be released. Different lenders have different amounts that they will allow for an escrow hold back, usually ranging between $2,000-$5000.
It is always best to see a mortgage professional and obtain a pre-approval before you begin to look for a property. Click Here to learn more about the pre-approval process and why pre-approvals are necessary, even if you’ve purchased and owned other homes.