By definition, a conventional loan is a loan given to a borrower without guarantee or insurance by the federal government. Conventional loans are popular because they have lower loan fees than other types of loans and are available to a large number of potential borrowers with a good credit rating. If you are wondering if you can qualify for a conventional loan or if this type of loan is suitable for your financing requirements, read on.
The terms of conventional loans are not a specific set of requirements and may vary from lender to lender. Nonetheless, the common terms expected of a borrower before a loan application is processed and a loan issued is as follows:
Credit Score: The Higher the Better
According to Ellie Mae Company, the average credit score for borrowers who can manage to secure and pay back a loan financing on time is about 720. For conventional loans, the borrower must make a minimum score of 620. Lower credit scores represent a higher likelihood of the borrower defaulting of loan repayment. The effect of low credit scores on borrowers may be reflected in higher loan insurance fees.
For borrowers with a lower credit score of less than 620, they might want to consider loans offered by the Federal Housing Administration which does not charge higher rates to borrowers with low credit scores.
Proof of Active Income Earning:
The lender will require the borrower to provide evidence of employment for at least the last 2 years. In this case, the borrower needs to prove to the lender that they have an income stream from secured through employment.
A guaranteed income stream derived has a value that can be expressed in present terms and be relied upon as security of the loan. The documents to prove employment may include tax return certificates, 30-day pay tubs as provided by the employer, a letter of an employment offer, and academic graduation certificates for those yet to start employment.
Property and Value of the Property:
The size of the loan to be extended to the borrower is a percentage of the value of the house as at the date of the appraisal.
The value of the house is determined by its geographical location and its physical condition. The higher the value of the house, the higher the amount a borrower can qualify for in form of a loan.
Down Payment Requirement:
The down payment required in the 5% Conventional Loan is 5% of the purchase price of the housing property.The amount of down payment has a direct influence of the interest rate charged on the loan. The amount of down payment will also determine how much the borrower pays in loan insurance fees. Generally speaking, the higher the down payment, the lower the insurance fee and interest rates charged on the loan.
Down payment seeks to reaffirm to the lender the borrower’s commitment to share the financial risk of buying and holding the property. The amount of down payment deposit shows how much stake the borrower is willing to take of their own money to acquire the house.
Private loan insurance is required whenever the borrower cannot make a down payment of more than 20% of the purchase price of the house when applying for a loan.
Additionally, the amount payable in the loan insurance fee is dependent on the borrower’s credit score. For instance, a loan insurance company may quote a loan insurance fee of $123 for a borrower with a credit score of 740 and who is making a down payment of 5% of the purchase price of the house as a down payment.
Another borrower with a lower credit score of 660 and who is willing to make a 5% down payment on the purchase price of the house will pay about $295 in loan insurance fees. Loan insurance fees have the capacity of pushing loan affordability from the reach of a borrower with a pretty low credit score.
Here, the lender wants to recommend what percentage of your income should be available to meet debt service obligations when they are due. The federal law has capped the market ratio at a 43% debt-to-income ratio.
The debt-to-income ratio is a measure of the borrower’s financial prudence and shows the amount of income that goes to the settlement of debt before the loan is given. Many lenders commonly prefer a ratio of less than 36%.
Loan Limit Amount and Other Loan Closing Fees:
Many conventional loans are capped at $510,400 but the limit can go higher in other localities. Other fees that may be charged on a loan may include ledger fees, property appraisal fees, title clearance costs, and loan reporting fees. For the prime borrowers, the lender may cover these costs to hasten the closing of the deal.
Overall, the terms required to secure a 5% conventional loan look and seek to map out low-risk borrowers. Borrowers with high credit scores will benefit from low rates on loans and low loan insurance fees.