Conventional Loan - Trinity Mortgage

What is a Conventional Loan?

A conventional loan is one where the lender assumes all the risk for approving a mortgage application. Other programs do provide a guarantee to the lender in part or all and they are loans approved using VA, FHA and USDA guidelines. With a conventional loan, there are no third party guarantees. However, by far a conventional loan is the most popular with home buyers. Most conventional loans are underwritten to guidelines set forth by Fannie Mae and Freddie Mac. These loans are often referred to as conforming loans because they conform to the guidelines established by either Fannie or Freddie.

When loans are approved using these guidelines, lenders then have the ability to sell those loans either to other lenders or directly to Fannie Mae and Freddie Mac, depending upon which program the loan was underwritten to. Selling loans allows lenders to continue making loans instead of running out of money as a result of loaning it out. That’s is the primary objective of Fannie and Freddie both, to provide liquidity in the mortgage market. Fannie and Freddie do not issue any sort of a loan guarantee but that’s not their mission- providing liquidity in the mortgage market by buying loans from issuing lenders is.

What are the Conventional Loan Requirements?

Conventional loans can be used to finance a variety of properties and not just limited to an owner-occupied property. Conventional loans are used to finance a primary residence, a beach or vacation home, a rental property or investment property. Conventional loans can be used to finance a single family residence, duplex, or 2-4 property.

The property must also be in good condition and must also be similar to other properties in the area. This similarity is determined by an appraiser preparing an appraisal report.

These loans can ask for a down payment as low as 3.0%. The 3% down conventional loan has specific guidelines the borrower must meet, like income limits. The gross income must be under the income limit for the area that the borrower is looking to purchase. If the borrower doesn’t qualify because they are over the income limit, then the next best option would be a 5% down conventional loan which doesn’t have income limitations. Providing a down payment less than 20% will require the borrower to obtain private mortgage insurance on the home. However, if the down payment is 20% or greater then there is no need for private mortgage insurance, or PMI.

What are the Conventional Loan Benefits?

The benefits with conventional loans are many. Most every mortgage lender will offer a conventional loan. This means more competition among lenders who want your business. Conventional loans come in all types of programs and terms and there is greater flexibility with conventional lending compared to government-backed loans.

VA loans are restricted to veterans of the armed forces, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and unremarried surviving spouses of those who died while serving or as a result of a service-related injury. USDA loans are restricted by location and income. FHA loans have loan amount limits and like the VA and USDA loan can only be used to finance a primary residence.

What are the Conventional Loan Limits?

Loan limits are set each year, in the fourth quarter of the calendar year. The Federal Housing Finance Agency, or FHFA, reviews the national median income for a single family home in October of each year and compares that figure with the number one year ago. If there is an increase, the conforming loan limit will be increased in the following year by the same percentage. If there is a decrease or no change in value, the conforming loan limit will stay the same throughout the following year.

In most parts of the country, the conforming loan limit for a single family home in 2019 is $484,350 and in areas deemed “high cost” the loan limit can be as high as $726,525 and still be considered Fannie and Freddie eligible. Any loan above these amounts fall into the “jumbo” category. For a duplex, the limit is $620,200, three-unit property is $749,650 and a fourplex $931,600.

What are the Conventional Guidelines?

Approval guidelines approve both the borrower as well as the property. As it relates to the borrower, income, credit and assets will be reviewed. Lenders calculate monthly debt-to-income ratios which is expressed as a percentage of gross monthly income. For those who bring home a pay check each month, lenders will ask for the most recent pay check stubs that cover a 30 day period. It is the gross monthly income used for this calculation, not “take home” pay.

For someone that is self-employed, the last two years of federal income tax returns will be needed along with a year-to-date profit and loss statement. Guidelines ask this income be averaged out to arrive at a monthly amount.

Credit and credit scores will be ordered and reviewed. Guidelines ask there be at least three trade lines appearing on a credit report such as credit cards, installment or student loans. Minimum credit scores apply for conventional loans and can vary based upon occupancy and the amount of down payment made. Most loan programs allow for a credit score to be as low as 620 with a down payment as low as 3% but there will be an adjustment to the interest rate compared to transactions where the qualifying score is 740 or higher.

Guidelines also ask there needs to be documentation in the file showing sufficient funds to close. Sufficient funds include the down payment, closing costs and cash reserves. Most conventional guidelines ask for at least three months’ worth of house payments be left over after the closing.

How to Qualify for a Conventional Loan

When qualifying for a conventional loan, you’ll need to supply the requested documentation along with your loan application. However, before applying for any mortgage, it’s best to obtain your preapproval from your loan officer. A preapproval is issued after review of your application and credit report. You’ll also be asked to provide more documentation after you have selected a property to buy. With a preapproval, all you need to do is find a property as all the rest of the documentation has been provided.

How to Apply for a Conventional Loan

It’s easy to apply for a conventional loan. The easiest and most convenient is to apply through our website. Once your application has been submitted and reviewed, we will then run the application through our automated underwriting system. The result of this submission will provide us a final list of what will be needed.

Simply answer the questions and complete the fields as requested. Don’t worry if you don’t have some of the answers exactly correct, such as how much money do you have available to close or the balance and value of any savings, checking and retirement accounts. We’ll get the documentation for that the closer we get to your closing.

Frequently Asked Questions About Conventional Loans
What is a conventional mortgage?
A conventional mortgage is one where the lender assumes the risk for making a loan. This is compared to a government-backed loan such as VA, FHA and USDA which carry some degree of compensation to the lender in case of default.

Where do I get a conventional mortgage?
A conventional mortgage is by far the most common residential mortgage loan issued today and are widely available. A conventional conforming loan is one where the loan amount does not exceed $484,350 for most areas.

What are the rates for a conventional mortgage?
Each lender is responsible for settings its own rates. There are no universal conventional rates.

What kind of credit do I need?
Minimum credit scores can vary based upon the selected loan program but most conventional loans ask for a minimum score of 620.

What are the approval guidelines for a conventional loan?
Most conventional loans use guidelines set forth by Fannie Mae and Freddie Mac. Income is verified with two years of W2 forms, recent pay check stubs, and two years of federal income tax returns if self-employed. Sufficient funds to close is verified with recent bank and investment statements. Minimum credit scores will also be required. There are other requirements but these are the most important.

Can I use a conventional loan to finance a rental property?
Yes, you can use a conventional loan to finance a rental property. In fact, a conventional loan is the most common option when buying a rental or investment property.

Can I use rental income to help qualify for a rental?
Yes, but the guidelines ask that you have verified rental income for the past two years. This verification is made with a review of your last two years of tax returns, specifically Schedule E of your return where rental income, depreciation and expenses are listed.

What are the closing costs for a conventional mortgage?
Closing costs for a conventional mortgage are much the same as any other type of loan. You can be provided with a list of potential closing costs by your loan officer.

How much down payment do I need for a conventional mortgage?
There are conventional programs that ask for a down payment of just 3.0% but designed to finance homes in underserved areas and/or for low-to-moderate income buyers. Otherwise, the minimum down payment is 5.0% of the sales price. Private mortgage insurance will be required if the mortgage exceeds 80% of the sales price of the home.

How much is private mortgage insurance?
Private mortgage insurance, or PMI, varies based upon multiple factors such as the amount of down payment, loan term and credit score. Lower down payments with lower scores will have more expensive PMI compared to a larger down payment and good credit scores.

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