A conventional loan can be simply defined as any loan that has not been guaranteed or insured by the federal government. It’s a great option for qualified borrowers as they typically offer the lowest costs and best interest rates. Are you qualified? Is this the best option for your particular set of circumstances? Here are some basic guidelines to take into account when considering a loan of this type.
Eligibility Guidelines for Conventional Loans
To begin, it’s important to keep in mind that while each lender will have a specific set of requirements for a loan of this type, they all need to fall within the guidelines set forth by the government sponsored programs referred to as Fannie Mae and Freddie Mac. These programs act as a standard system of checks and balances for lenders. That said, qualifying for a conventional loan usually begins with taking a look at your credit score.
Credit Score is Always Important
Securing a loan of this type requires “fair,” to “good” credit. With a credit score of 620, most lenders will consider you eligible, however chances are the interest rate is going to be higher due to the added risk of the lower score. Most lenders are looking for a credit score of 660 or above, with 700 acting as the benchmark for a loan of this type.
Down Payment Percentages
The amount of money you are capable of paying down on your loan will play a sizeable role in securing a conventional loan. The industry standard is 20%, however this varies according to how much you are borrowing and your credit score. With credit in the realm of 700, a down payment between 5 and 10 percent should provide you with an excellent chance for eligibility.
Assets and Income
In addition to your credit score and down payment, lenders are going to take a look at your assets and income. Cash reserves from three to 12 months can be required depending on the program, as well as pay stubs, W-2 forms, bank statements and job histories. Also keep in mind your debt-to-income ratio will come into play: 45-55 percent should keep you eligible.
If your set of circumstances allows you to match the basic requirements above, a conventional loan is a great option for home financing.