Most of the loans generates today are FHA insured mainly due to the low down payment requirements and lower credit scores to qualify. Nevertheless, conventional loans are still being generated in respectable numbers. A conventional loan may be a less expensive alternative as explained below, when the borrower has very good credit scores and has enough down payment for the property. The credit scores along with the down payment are directly affected by each other.
All conventional loans approvals are based on either Fannie Mae or Freddie Mac guidelines. Both Fannie and Freddie have “engines” which is a piece of software that mortgage companies have access to, to run applications once obtained from the client along with their credit report, to determine if the borrower qualifies for a certain loan amount based on the information provided by the borrower. This engine determines the eligibility and will provide us a decision with conditions. It’s up to us loan officers to interpret these conditions to determine what conditions would have to be met for the borrower to qualify.
Following are some of the features and requirements on conventional loans, which are embedded inside the complex software of those engines to determine the eligibility of the borrower:
- Credit score – the minimum score changes on a regular basis so call for details. Credit scores and down payment go hand in hand. The lower the score the greater the down payment required. For important information regarding your credit score check out the What is a credit score page and also our blog.
- Minimum down payment – this number is as low as 5% these days but you have to have a certain credit score. This number also keeps changing constantly so please call for details. There are also other restrictions imposed upon by the PMI companies(see below) regarding maximum debt-to-income ratios.
- Debt-to-income ratio - this is the total monthly payments divided by your gross income. The maximum this number can be depends on how much down payment your putting to buy. Call us for the most recent information.
- Private Mortgage Insurance(PMI) – any time the borrower puts less than 20% down payment the lender will require PMI to protect themselves in case of default. This will result in an extra amount added to the monthly mortgage payments and is based on the credit score, the house location, and the amount of down payment. The lower the down payment the higher the monthly PMI amount. On conventional loans as opposed to government loans, the PMI is never upfront but rather monthly, although some lenders offer the option of paying it upfront rather than monthly, by paying a higher interest rate. Since you are not required to pay it upfront, this is one of the biggest advantages on a conventional loan as opposed to FHA.
- Qualifying Properties – just like FHA single family homes, town homes, condos and even certain manufactured homes.
- Income Documentation - all income has to be verified by way of paystubs and W2’s. If a person is self employed or received variable income such as gratuities, overtime or commissions then tax returns will be required.
- Job Requirements – must have had a steady job for the past 2 years. Valid letters of explanation will be required to explain gaps in employment.
- Non occupying co-borrower – this is allowed. A relative’s income and credit history can be used for qualification purposes but other requirements have to be met.
- Loan amount - max loan amount in Palm Beach, Broward and Miami-Dade is $423,750. Other counties such as Monroe(the Keys) can go as high as $729,750. Call or email us for other counties. For loan sizes up to $3M see our JUMBO Loans program.
- Seller Contribution – this is another big difference as compared to FHA.The maximum seller contribution can be anywhere from 3-9% depending on down payment. If you are putting between 10-25% down payment the contribution can go up to 6%. With more than 25% down the contribution can be up to 9%.
- Purpose of Loan - loans can be for occupying borrowers, second homes and investment properties. There are varying number of credit score and down payment requirements to qualify. Call for details.
- Foreclosures – foreclosures in the credit report have to show that a minimum of 2-7 years have transpired since the date of the foreclosure, depending on the down payment.
- Bankruptcies – a minimum of 2 years since the bankruptcy was discharged is necessary in general for conventional lenders. In addition certain credit history must have been established.
These guidelines are subject to change without notice. There are many other requirements which need to be met which are part of the underwriting process. If you are looking to buy a house for the first time, go to our first time home buyer page for additional information. First time home buyer or not, the best thing you can do is get prequalified to see what you qualify for. Complete our oan application or call one of our agents and they will be happy to assist.