Conventional loans are available for purchases of condominiums, planned unit developments, modular homes, manufactured homes and one-to-four family units. Homeowners can hold loans for primary and secondary residences, as well as investment properties. Investment properties can really pay off after you complete the loan or mortgage agreement, especially if the property has livable space. Imagine a number of tenants paying you each month to reside within your property. If you are holding a mortgage or loan on your primary residence, the extra income can come in handy for making your payments larger or faster. Even if you are not paying on a mortgage or loan for your primary residence, the extra income from your tenants can be invested for a lucrative and lively retirement.
Should you decide that conventional loans are the right choice for buying your new home, you need to know that they are not backed by government agencies. They follow the rules set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). There is little deviation from these set rules. These types of loans are ideal for borrowers with good or excellent credit history. Anyone with at least a 620 credit score is likely to be approved for this type of loan.
Conventional loans are the most popular way to finance a new home purchase. Three-quarters of new home sales in the first quarter of 2018 were financed using this type of loan. Borrowers with excellent credit history get the best interest rates, and usually, the average loan period is 30 years. Thirty years definitely seems like it is the right time frame to pay off a new home purchase, especially since borrowers with excellent or good credit history are the most likely to be approved. However, your down payment has a lot to do with the longevity of your loan. If you choose a loan with a higher down payment, such as 10 or 20 percent, you will likely not have a 15- or 30-year mortgage. A down payment of 3 or 5 percent will likely mean that borrowers will have a 15- or 30-year mortgage.
However, not all approved conventional loans belong to borrowers with good or excellent credit histories. Credit unions and independent banks may be able to qualify borrowers with credit problems as there are fewer hurdles to qualify. Debt-to-income ratios are used to evaluate an applicant’s expenses versus earnings. Sometimes, if the debt-to-income ratio is manageable, the borrower will sneak by with an approved loan. However, if the borrower’s expenses greatly outweigh their income, their loan application will likely be rejected.
To be approved for conventional loans, a borrower’s front-end ratio, or the mortgage payment plus the HOA fees, property taxes, mortgage insurance and homeowner’s insurance, needs to be less than 28 percent. A borrower’s back-end ratio, or the mortgage payment plus monthly debt, including credit card, car and student loan payments, need to be less than 36 percent. Higher front- or back-end ratios than the outlined guidelines will give lenders cause for concern that you will not be able to hold up your end of a mortgage agreement or loan. Lenders want to know that they are dealing with a borrower who is a good risk that will fulfill every part of the agreement.
If you are considering applying for conventional loans, you need to keep in mind there are several requirements before approval will even be considered. A minimum credit score of 620 is an absolute requirement, especially if your credit and financial history are less than flawless. Even if you have never owned a home before, your past housing payments will be taken into consideration. You need to have successfully made your housing payments on time for at least the past 12 months. Borrowers who may have entered into bankruptcy or even foreclosure need to fulfill a required waiting period before their application will even be considered. Applicants who have filed for Chapter 13 bankruptcy need to wait at least two years, while those who filed for Chapter 7 bankruptcy or experienced a foreclosure must wait at least four years.
For your application to even be approved, you need to have a relatively flawless credit or financial history. Late payments on major accounts within the last year are considered unacceptable. Major accounts are considered to be credit cards, car payments and even student loans. One of the biggest credit errors a person can make is defaulting on a student loan or letting credit card debt become a write-off. Most defaulted student loans end up automatic judgments, meaning the court has the right to garnish your wages or even freeze your bank accounts until the debt is paid. The same thing can happen for credit card debt that is written off. After a certain period, the written-off debt may fall off your credit report, but technically the debt can still be collected. The credit card company can go to the courts and apply for a judgment. If you apply for conventional loans, outstanding judgments within the past year are unacceptable.
Loan-to-value (LTV) requirements are based on your credit score. Better credit scores will have higher LTV limits. It really does help your application to have high credit scores and LTV limits as both can waive the mortgage insurance requirements. This means that you truly appear as a positive risk to your potential lender. To stay in good standing of your loan agreement, the home must be appraised before you complete your purchase. If the appraisal comes in higher or lower than initially reported, adjustments will need to be made to the agreement and likely the monthly payment amount. You should also be prepared for additional fees being involved with the additional appraisal needed.
Most homeowners likely have a conventional loan. Maybe it is because they learned about it from their parents, or maybe it is because their financial planner suggested it. Careful financial planning can help guide you through making your payments and fulfilling your agreement. Some will tell you it is not always easy to be sure you can afford to make your monthly payments on time. Paying a mortgage or loan while fulfilling other monthly bill obligations can be stressful. Lenders will not be standing by to help you figure out how to stay on track, so you will have to go it alone. Should you enter into a financial situation while trying to make the payments and you cannot find any areas within your budget to cut, you can look into refinancing your mortgage or loan. However, refinancing a mortgage or a home loan may not always be available, so you may want to get your financial affairs in order quickly. When all else fails, you can always try calling your lender and explaining your situation. Sometimes they are willing to work with you in your current situation. While it may not be possible to skip a payment or two, they may be able to work with you and reduce your monthly payment until you are back on your feet.
Once you have figured out you are in trouble with making your mortgage or loan payments, you should figure out the quickest way to get out of your situation. Missing too many payments can put you in the position of facing foreclosure. This can leave a permanent scar on your credit history and your financial future. A foreclosure is very hard to get out from under once the process has started. Even if you can get out from under it, you may have to wait an extended period, depending on your circumstances, before you can purchase another home. Foreclosure is not a good situation for potential home buyers or sellers. Buyers may have to work through the red tape in place to complete the foreclosure process for the former owner. The seller likely had to go through the same red tape, if they are not the original owner who started the foreclosure process.
