Overview of Conventional MortgagesWhen it comes to purchasing a house, most people will need to take out a mortgage. A conventional mortgage is the most common type of mortgage, where a lender provides a loan to a borrower to purchase a home. The difference between a conventional mortgage and other types of mortgages, such as FHA and VA loans, is that it is not insured or guaranteed by the government. Conventional mortgages can come in various forms, including fixed-rate mortgages, adjustable-rate mortgages, and jumbo mortgages. A fixed-rate mortgage has a set interest rate for the life of the loan, while an adjustable-rate mortgage can have a variable interest rate. A jumbo mortgage is a type of mortgage that exceeds the limit set by the Federal Housing Finance Agency (FHFA).
Benefits of a Conventional MortgageOne of the main benefits of a conventional mortgage is that it can be used to purchase almost any type of property, including single-family homes, condos, townhomes, and multi-unit properties. Another advantage of conventional mortgages is that they typically have lower interest rates compared to other types of loans. Additionally, conventional mortgages offer more flexibility in terms of loan terms and down payment options. While a 20% down payment is ideal to avoid mortgage insurance, it is not required. Borrowers can put down as little as 3% of the home’s purchase price with some conventional loans.
Stricter Rules for Conventional MortgagesWhile conventional mortgages have their benefits, they also come with stricter rules compared to other types of mortgages. Lenders typically require a higher credit score and a lower debt-to-income ratio (DTI) for borrowers to qualify for a conventional loan. Let’s take a closer look at these requirements.
Understanding Credit Score RequirementsYour credit score is a three-digit number that represents your creditworthiness and how likely you are to repay your debts on time. For conventional mortgages, lenders typically require a credit score of at least 620 to 640. However, to get the best interest rates and loan terms, a credit score of 740 or higher is recommended. Key Point: A higher credit score can help you qualify for a conventional mortgage with better interest rates and favorable loan terms.
Debt to Income (DTI) Ratio ExplainedAnother important factor that lenders consider when approving a conventional mortgage is your debt-to-income (DTI) ratio. This ratio measures how much of your monthly income goes towards paying your debts, including car loans, credit cards, and other mortgages. To qualify for a conventional mortgage, your DTI ratio should typically be below 43%. However, some lenders may allow a slightly higher DTI ratio based on other factors. Bullet points:
- Your monthly mortgage payment (principal, interest, taxes, and insurance) should not exceed 28% of your gross monthly income
- Your total monthly debt payments, including your mortgage, should not exceed 43% of your gross monthly income
How Much Do You Need for a Down Payment?One of the most significant advantages of a conventional mortgage is that you can purchase a home with a lower down payment compared to other types of mortgages. Depending on your lender and creditworthiness, you may be able to qualify for a conventional loan with as little as 3% down, but keep in mind that a higher down payment will lower the monthly mortgage payment and the interest costs over the life of the loan.
Pros and Cons of Using a Conventional MortgageHere are some pros and cons to consider before choosing a conventional mortgage: Pros:
- Lower interest rates compared to other types of mortgages
- Flexible loan terms and down payment options
- Does not require a specific property type or use
- Requires a higher credit score and lower DTI ratio
- May require private mortgage insurance (PMI) with a down payment less than 20%
- Takes longer to process compared to other types of mortgages