In comparison to buying a home, other seemingly significant purchases in your life ― your computer, your mattress, and even your car ― are child’s play. Homes cost several hundreds of thousands of dollars ― more than you likely make in five years ― which means it is likely impossible for you to simply save up and buy a home with cash. Instead, if you want to own the roof over your head, you’ll need to get a loan.
More than half of all homes are obtained thanks entirely to home loans, which are often called mortgages, but that doesn’t mean getting a loan is a simple process. If this is your first home, you probably want a simple starter home ― which probably calls for a conventional loan. Thankfully, conventional loans are perhaps the easiest of all mortgages to understand and acquire; unfortunately, they still take some explaining. Here’s a handy guide to help you answer questions like “What is a conventional loan?” and “How do I get one today?”
Benefits of a Conventional Loan
The conventional loan is easily the most common of all mortgages. Conventional loans are suitable for all sorts of property purchases: primary residences, second homes, and rental properties, which may be single-family homes, condominiums, multi-unit properties, planned unit developments, and more. The broad application of conventional loans makes them popular amongst all real estate investors, from private to professional homebuyers.
Requirements of a Conventional Loan
To obtain a conventional loan, you need to prove that you can make regular payments. Lenders typically require documentation of your income history, to include bank statements, paychecks, tax returns, W2s, and other information that explains your financial situation. Additionally, you need a credit score of at least 680. However, even if your credit score is healthy, your debts shouldn’t be out-of-hand; few lenders will accept borrowers who have a debt-to-income ratio higher than about 43 percent. The better your income and credit score, the lower your interest rate, so if you can improve either before you buy a home, you should.
Additionally, to secure a conventional loan, you will need to make a down payment. Conventional loans only require as little as 3 percent down, but most borrowers expect around 20 percent of the property’s price upfront. The more you can pay right away, the better your interest rate in the long term.
Conventional Loan Providers
Almost every mortgage provider has a conventional loan program because most Americans will seek a conventional loan before investigating other options. Because home loans seem like significant products, many borrowers go straight to major financial institutions to acquire a mortgage, but smaller, less-famous lenders often have better rates and policies. For example, you might investigate the mortgage program at a local credit union or search online for a digital lender.
The lender you choose matters for dozens of reasons. First, you want to find the best possible rates for your mortgage, so you don’t pay more than necessary. Additionally, you should trust your lender, since you will be dealing with them until you move homes (or until you pay off your mortgage). You should feel comfortable and secure with your lender; if at any time you mistrust your lender during the process, there are thousands of others willing to provide a comparable service.
Conventional Loan Alternatives
Though conventional loans are wide-reaching and relatively flexible, not all homebuyers can fulfill the requirements for them. Some desire a home that costs more than a conventional loan allows, and some don’t have the healthiest credit history. If, after reading this guide, you aren’t certain that a conventional loan will work for you, there are alternatives that will help you secure the right mortgage for your home and lifestyle.
- Jumbo loans. Jumbo loans exceed the conventional limit for mortgages, meaning you can acquire a home loan of more than $417,000 to buy an expensive property. However, there are some dangers to jumbo loans: Interest rates are higher and credit requirements are stricter, making them more difficult to obtain.
- FHA loans. The Federal Housing Administration is interested in helping all Americans find places to live. Thus, its FHA loan program helps low-credit borrowers secure low interest rates and make lower down payments. The FHA doesn’t lend money, but its mortgage insurance makes it possible for those with high debts to buy property.
- USDA loans. Finally, if you don’t mind living away from the city, you might be interested in the United States Department of Agriculture’s mortgage program. As long as you buy property within certain geographic regions, the USDA will help you secure a loan with low interest rates and no down payment, which is nearly impossible with conventional loans.