When it comes to financing the purchase of a new home, the conventional home loan is one of the most popular options. In this article we will address some of the basics that any home buyer looking to purchase a primary home with a conventional loan, should know.
Loan Type: When someone discusses a conventional home loan, they are generally referring to a Fannie Mae or Freddie Mac backed loan with a conforming loan limit.
Loan Amounts: The conforming loan limit for a conventional home loans currently sits at $417,000 in most areas of the country, except for certain designated high cost counties, for which higher limits are allowed. Here in Arizona, all conventional loan limits currently sit at $417,000.
Down Payments: If you are a first time home buyer, the minimum down payment for a conventional loan can be as low as 3%. For all other buyers, the minimum down payment is still only 5%. However, it will take a 20% down payment to obtain a new mortgage without mortgage insurance.
Credit Scores: In general the minimum credit score for a conventional home loan is a 620 credit score. However, on a conventional home loan you are rewarded with the best available interest rate with a 740 credit score and then every 20 points your score is below that level, there could be an effect on your actual interest rate.
Debt To Income Ratios: The debt to income ratio is another important part of qualifying for a home loan and refers to a ratio of your monthly gross pay versus your monthly payments. For instance, if you had a gross salary of $60,000 or $5,000 per month and all of your current payments that appear on your credit report (credit cards, auto loans, student loans, etc.) and your new potential mortgage payment equal $2,000, then your debt to income ratio would be 40% ($2,000 / $5,000). In general, it is best to have your total debt to income ratio not exceed 45% if you are looking to be approved for a new conventional home loan.
Employment History: Lastly when it comes to qualify for a conventional home loan, in general you want to be able to show two years’ work experience in the line of work you are currently in. It is ok to have switched jobs in the past two years, so long as the positions are in a similar line of work. In addition, if you graduated from college less than two years ago, the two year work requirement can be waived if your college experience was preparation for your current employment position.
These are just some of the basics of obtaining a conventional home loan, but at the same time, if you adhere to the standards above, then you stand a good chance of putting yourself in position to qualify for a conventional home loan.