Here are a few of the details of using a conventional loan for financing a first home purchase
A conventional loan is a type of mortgage loan that is not backed by a government agency such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Here are some details about using a conventional loan for financing a first home purchase:
- Eligibility: To be eligible for a conventional loan, you typically need a credit score of at least 620, and a debt-to-income (DTI) ratio of no more than 50%. You must also have a steady income and a history of paying your bills on time.
- Down Payment: The down payment requirement for a conventional loan can vary depending on the lender, but generally you need to put down at least 3% of the purchase price. However, putting down less than 20% will likely result in the requirement to pay Private Mortgage Insurance (PMI) until the loan-to-value (LTV) ratio is at 80%.
- Mortgage Insurance: If you put down less than 20%, you will be required to pay PMI until the LTV ratio reaches 80%. The amount of PMI can vary depending on the size of your down payment, credit score, and other factors.
- Loan Limits: Conventional loans have loan limits that are set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and sell mortgage loans. In most areas of the country, the loan limit for a single-family home is $647,200.
- Property Requirements: There are no specific property requirements for a conventional loan, but the property you purchase must meet certain appraisal standards to ensure that it is worth the purchase price.
- Closing Costs: You will be responsible for paying closing costs when you take out a conventional loan. These can include fees for the appraisal, title search, credit report, and other charges.
- Loan Process: The process of obtaining a conventional loan is similar to that of an FHA loan. You will need to complete a loan application, provide documentation of your income and assets, and undergo a credit check. The lender will also need to appraise the property to ensure it meets their standards.
Overall, a conventional loan can be a good option for first-time home buyers who have a higher credit score and a larger down payment. However, it is important to consider the costs of PMI and other fees associated with the loan.
What are the Disadvantages of a Conventional Mortgage Loan?
While conventional mortgage loans are a popular option for many borrowers, there are also some potential disadvantages to consider. Here are a few of them:
- Higher Credit Score Requirements: Conventional loans generally require a higher credit score compared to government-backed loans like FHA and VA loans. This means that borrowers with lower credit scores may not be eligible for conventional loans or may face higher interest rates.
- Larger Down Payment: Conventional loans typically require a larger down payment compared to government-backed loans, with a minimum down payment of 3% for some conventional loans but up to 20% for others. This can be a significant hurdle for borrowers who don’t have a large amount of cash on hand.
- Private Mortgage Insurance (PMI): If the borrower puts less than 20% down on a conventional loan, they may be required to pay for private mortgage insurance (PMI), which is an added cost that can increase the overall cost of the loan.
- More Stringent Income and Debt Requirements: Conventional loans may have more stringent income and debt requirements compared to government-backed loans, which can make it more difficult for some borrowers to qualify.
- Limited Eligibility: Conventional loans may not be available to all borrowers, such as those with low credit scores or who are unable to make a large down payment.
It’s essential to weigh the advantages and disadvantages of conventional loans carefully before making a decision. Speaking with a mortgage professional can help borrowers determine whether a conventional loan is the right choice for their unique financial situation.