Qualifying for a Conventional Home Loan: What Do You Need?
After the huge mortgage bubble burst in 2008, getting a mortgage was very difficult for a number of years. Thankfully, banks and other lending institutions have loosened the reigns a bit so that more people today can qualify for loans. But, that doesn’t mean getting a mortgage is easy. You still have to meet certain qualifications to get a home loan.
The sad truth is not everyone will qualify for a mortgage, or the loan that is available to them is simply unreasonable because of substantial down payments or large interest rates. You may need to make some changes to ensure that you can get a loan that works for you and your family. Knowing how to qualify will get you started.
Although you may have heard that conventional loans are only available if you have a 20% down payment, you can actually get a loan with as little as 3% down. Interestingly, that is even lower than FHA requirements.
There are a few benefits to having the full 20% saved when you purchase a home, however. The most important advantage is that you pay interest on less total money, which can save you thousands of dollars over time.
Another significant benefit is that you don’t have to pay “PMI” or private mortgage insurance. This extra monthly cost is designed to protect the lender if you suddenly cannot keep up with your mortgage payments. Your PMI rate varies from 0.03 to 1.5 percent of the original loan amount per year.
Credit Score Requirements
Every lender varies on their minimum credit score permitted. As a rule, however, conventional lenders are looking for a minimum credit score in the range of 620. While this may seem on the low end, you should keep in mind that the higher your credit score, the lower interest rates you are likely going to be able to get.
For example, the difference in payments between a credit score of 750 and 670 is about $60 per $100,000 borrowed, per month. That means that you’d pay an extra $1,440 per year, every year for the life of your loan if you purchased a $200,000 house. Assuming you have a 30-year mortgage, that adds up to over $43,000. This credit hit is easier to do than you might think—it takes just one account that is 90 days late for a roughly 75-point drop.
Debt to Income Ratio
Another factor that lenders consider is your debt to income ratio. This ratio represents how your overall debt compares to your income. The requirements for this number will vary by lender, and it may also be affected by your ability to make a down payment and your credit score. For example, you may need a lower debt to income ratio if you aren’t able to make a full 20% down payment.
Generally, the highest debt to income ratio you can have for a conventional loan will be in the range of 43%. But, if you have good credit and savings, your debt to income ratio could be as high as 50%.
Your lender will also require a wide range of documents to show that you are financially stable. Information about your employment will also be requested. Preparing properly will make this process run much more smoothly and increase your chances of getting a home loan at a rate that makes sense for you.