A conventional loan is any loan that conforms to the Government Sponsored Enterprise (GSE) guidelines. They are not guaranteed by the federal government but still follow the same guidelines. They can be either conforming or non-conforming. Conforming loans follow the conditions and terms set by FannieMae and FreddieMac as far as Underwriting is concerned. Non-conforming loans, on the other hand, do not meet FannieMae or FreddieMac guidelines but are still considered conventional. A good example of this is a Jumbo Loan.
Generally, conventional loans require a higher middle credit score compared to their FHA counterpart. A middle FICO score of at least 620 is a rule that most lenders require at a minimum to qualify for a conventional loan. Most bigger lenders would require higher FICO score. Down payment requirement is also higher on conventional loans. Borrowers are required to put at least Five percent (5%) down to purchase a house. Some borrowers are required a higher down payment depending on the individual borrower’s circumstances. They could be required a higher down payment to compensate for the lack of credit, short job history or for any other reason to qualify. The debt-to-income (dti) ratio requirement for a conventional loan is entirely different from FHA loans too. The standard rule for the debt-to-income ratio is 28/36 without any compensating factors. This is the rule that most lending institutions follow. AMCAP Mortgage is one of the few direct lenders that offer a higher debt-to-income (dti) ratio of up to 45%. The interest rate, although determined by the individual borrower’s credit score and down payment, is typically higher compared to FHA. Borrowers looking to compare the two loans, between conventional and FHA, will find that for the same loan amount, interest rate on conventional will be about half a percentage point (.50%) higher, if not more.
Mortgage Insurance on conventional loans is called Private Mortgage Insurance (PMI). It is unique to the borrower’s situation starting with credit score, income, total monthly obligation, property location, among other things. This can be either included in their monthly payment or paid up front. Borrowers who would rather not pay a monthly PMI can pay this fee up front at closing. This amount is over and above the required down payment, closing costs and pre-paid items. There is a maximum loan amount a borrower can get on conventional loans. This maximum loan amount varies from county to county. Right now, the maximum available for conventional conforming loan in any county is $424,100 (subject to change).
After discharge of a Chapter 7 bankruptcy, a borrower can be eligible for a conventional loan at least four (4) years, if not longer, up to seven (7) years, depending on whether a borrower is going to Fannie Mae or Freddie Mac. For a Chapter 13 bankruptcy, a borrower must be able to document that they already have a re-established credit at least two (2) years after discharge or four (4) years after the Chapter 13 has been dismissed. This guideline must be followed as far a waiting period after a bankruptcy in order to buy a house and qualify for financing.
For more information, feel free to contact our Home Loan Specialist at 281-860-2533.