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- Lower Interest Rate
- Higher Loan Limit
- Flexible down payment options at 3%, 5%, 10% and 20%, respectively
- Opportunity to get a loan if your credit doesn't meet conforming loan requirements
- Higher credit score requirement of at least 620
- Higher down payment requirement
- Stricter qualifying guidelines than an FHA
A Conventional loan is a mortgage loan that's not backed by a government agency. Conventional loans are broken down into "conforming" and "non-conforming" loans. If you're deciding between a conventional loan vs. a government-insured loan, the right one for you depends on your specific financial situation. If you have a high credit score of at least 740 and you can afford to make a 5% to 20% down payment, a conventional mortgage may offer the best interest rate and lowest fees, saving thousands.
A Conforming Conventional Loan is a loan that adheres to the standards set by Fannie Mae and Freddie Mac, including maximum loan amounts. In 2019, the standard limit for a conforming conventional mortgage is $484,350 for a single-family home that the borrower intends to occupy. For borrowers in higher value areas, the limit can be as high as $726,525. These loans can have fixed or adjustable mortgage rates. An amortized conventional loan gives borrowers a fixed monthly payment from the beginning to the end of the loan repayment time period, with no balloon payment. A fixed-rate conventional loan has the same interest rate, therefore, the same monthly payment throughout the life of the loan. With an adjustable-rate mortgage loan, you get a fixed interest rate for a set period, typically between 3 and 10 years. After that the interest rate can adjust each year based on the current market rates.
A Jumbo Loan typically requires higher credit scores than conforming loans (700 or higher), and you might need to have a lower debt-to-income ratio (DTI) as well as put down a larger down payment for more "skin in the game". The borrower still may end up with a higher interest rate than a conforming loan because the larger loan amount represents a bigger risk to the lender.
A Subprime Conventional Loan is a non-conforming and may charge high closing costs and interest rates. However, they can also provide a way to get into a home without needing to wait until your credit is in excellent shape.
- Lower down payment at 3.5%
- Lower credit score starting at 500 to qualify
- Higher debt-to-income (DTI) ratio accepted at or below 43% qualification
- No income limitations
- Typically higher interest rate
- Mandatory PMI (Private Mortgage Insurance)
- Less of an incentive to Sellers
- Stricter qualifying guidelines than an Conventional
- Loan limits are typically lower than conventional
FHA loans are mortgages that are insured by the United States (the Federal Housing Administration). FHA loans are considered slightly more risky to the lender since borrowing criteria is less strict, so the government backs the loan to reduce the lender's risk and you have to pay insurance for the life of the loan unless you refinance after being down to 80% of the loan to value (or if it's worth $100,000, you owe $80,000 or less.)
- Zero downpayment required
- No Private Mortgage Insurance (PMI)
- Lower rates and costs
- Flexible refinancing
- Shorter wait time from bankruptcy or foreclosure
- Funding fee
- No investment or vacation properties
- Stricter qualifying guidelines than a Conventional or FHA loan
- Not as desirable to Sellers
VA loans are backed by the VA and offered exclusively to eligible active-duty members of the military, veterans or surviving spouses. These can be used to buy a new property or refinance an existing mortgage. However, it's important to know that you can only have one VA loan at any given time. If you own a home financed with a VA loan, to get another VA loan you must first liquidate your current VA loan before persuing another either by selling the existing property and then purchasing another, or by using alternative financing methods to purchase before selling the current property - and then refinancing with a VA loan down the road.
VA loans are backed by the U.S. Department of Veterans Affairs (VA), but the money isn’t coming from the government. Instead, banks, mortgage companies, credit unions and other kinds of mortgage lenders offer these, and the VA guarantees them in the event of a default.
List Of Documents Your Lender Will Need
Gathering the necessary paperwork your lender will need will save time and stress. Here are the documents every lender will need to finalize your pre-approval and issue a letter of pre-approval. Prior to this, you can complete a Uniform Residential Loan Application either in person or online with a lender.
Lenders may require more or less, depending on the type of mortgage and your specific financial situation.
- Last 2 years' W-2 forms
- Last 30 days' paystubs
- Last 2-3 years' income tax returns
- Alimony or child support documents
- Divorce decree, if applicable
- Bankruptcy or foreclosure records, if applicable
- 2-3 months of bank statements
- Retirement or investment accounts if being used
- Gift letter if utilizing a gift from a family member
- If renting, 12 months proof of rental payement history
- If self employed, year-to-date profit & loss statement certified by accountant
Once in Contract to Purchase
- Signed copy of Purchase and Sales Agreement
- Updated paystubs
- Updated bank statements
The factors that contribute to a higher credit score include a history of on-time payments, low balances on credit cards (under 10% usage is best), a mix of different credit card and loan accounts, older credit accounts, and minimal inquiries for new credit. Late or missed payments, high credit card balances, collections, and judgments are HUGE credit score detractors!
The most effective ways to increase your credit score are:
- Make sure you pay at least the minimum balance due on time for at least 12 months
- Pay down your credit card balances to keep your overall credit use under 30%
- Don’t close old credit card accounts or apply for new ones without lender's advice
- Have revolving credit, if necessary, secured credit over no credit cards at all.
- Have a bank account with your savings. Mattress money does not qualify as collateral.
90% or more of the top lenders use your FICO score which is determined by these 5 factors:
- 35% Payment history
- 30% Credit usage
- 15% Age of credit accounts
- 10% Mix of types of credit
- 10% New credit inquiries How to improve credit
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