There are different types of conventional loans available to prospective home buyers. Any loan that conforms to the guidelines of the Government Sponsored Enterprise is a conventional loan.
The major difference between conventional mortgage loans and government-backed loans is that conventional loans do not have a federal government guarantee. On the other hand, both loans are similar as they follow the same guidelines. Conventional loans can either be nonconforming or conforming.
While conforming loans follow the guidelines set by Fannie Mae and Freddie Mac, non-conforming loans do not meet these guidelines. An example of such loans is a jumbo loan.
Conventional loans require a higher middle credit score, unlike their FHA counterpart and other government-backed loans. Most lenders require applicants to have a minimum middle FICO score of 620 to qualify for a conventional loan. However, bigger lending institutions require home mortgage applicants to have a higher FICO score.
Another major requirement of conventional loans is the high down payment. Unlike government-insured loans, conventional Texas home mortgages require a relatively higher down payment. Therefore, lending institutions require borrowers to make a minimum down payment of 5 percent of the price of the home. The percentage of down payment required is usually dependent on the lender and circumstance of individual borrowers. Persons with marginal credit, short job history, or any factor that could negatively affect their chances of qualifying for a loan usually have to make higher down payments. This is done to compensate for the inadequacies in their profile.
Another requirement that borrowers need to satisfy to qualify for a conventional loan is the debt-to-income ratio. The debt-to-income ratio for a conventional loan is different from what is obtainable with FHA and other government-backed loans. The standard rule as regards debt-to-income ratio is 28/36. Most lenders follow this rule, and it has consequently become the standard. However, it is worth noting that some lenders offer higher or even lower debt-to-income ratio.
One major feature and difference between conventional loans and government-backed loans like the FHA is the high-interest rate. While the interest rate for conventional loans is determined using the credit score of the borrower and down payment, it remains higher than government-backed loans. When you compare the cost of taking the same amount from conventional and FHA sources, you will realize that you pay more on conventional loans. In most cases, the interest rate on conventional loans comes at a premium of about .50%.
Private Mortgage Insurance, also is known as PMI, is the mortgage insurance on conventional loans. To calculate the PMI for each borrower, his credit score, total monthly expenses, total income, the location of the property and other such factors are considered. The Private Mortgage Insurance can be either paid up front or included in the monthly payment. Alternatively, borrowers can pay the fees upfront at closing as opposed to a monthly PMI payment. The PMI is usually over the required closing costs, down payment and pre-paid items.
Is there a limit?
Prospective borrowers should also note that there is a limit to the amount that can be borrowed on conventional loans. However, the maximum amount varies depending on the county and changes depending on policies and economic realities.
Bankruptcy is one of the major factors that hinder borrowers from getting a conventional mortgage loan. However, a borrower can apply for a conventional loan at least four years, if not longer, up to seven years after discharge of a Chapter 7 bankruptcy. It is also worth noting that this depends on where the borrower is going, that is, Fannie Mae or Freddie Mac.
However, for a Chapter 13 bankruptcy, borrowers are required to show that they have been able to re-establish credit for a minimum of two years after discharge. A minimum of four years is required after the dismissal of Chapter 13. For borrowers that have bankruptcy cases, it is important to follow these guidelines.
While conventional loans might not particularly be the best mortgages, they are very helpful for persons that do not want to go the route of FHA loans and other government-insured mortgages. However, it is advised that you understand the details of any loan you are getting into to avoid getting your fingers burnt.