Conventional Loan Modification
WHAT IS
Conventiional Loan
A conventional loan is a mortgage loan that’s not backed by a government agency. These loans come in all shapes and sizes, and while they don’t provide some of the benefits as FHA, VA and USDA loans, conventional loans remain the most common type of mortgage loan. While some government-backed loans provide unique benefits to homebuyers, conventional loans remain far and away the most common type of mortgage. According to the National Association of Home Builders, conventional loans accounted for 78.5% of new home sales in the first quarter of 2022. If you’re thinking about buying a home, here’s what you should know about conventional loans to get an idea of whether it’s the right fit for you.
WHY
Conventional Loan
Compared with government-backed loans, qualifying for a conventional mortgage may be tougher, but a conventional loan can be a good option for many home buyers.
- More property types: In addition to jumbo loans for pricier homes, conventional loans can be used for a second home or an investment property.
- More control over mortgage insurance: If your down payment on a conventional loan is less than 20%, you’ll have to get private mortgage insurance. After your principal loan balance drops to 78% of the home’s value, however, you can ask to cancel your PMI. In contrast, mortgage insurance premiums on FHA loans can last for the life of the loan
- .No program-specific fees: Though you’ll likely still pay fees to the lender, conventional loans don’t have the additional program-specific costs of government-backed loans. For example, with an FHA loan, you’ll pay a 1.75% upfront mortgage insurance premium; VA loans have a funding fee of 1.4 to 2.3%, depending on your down payment.
- More choices in loan structure: Though 30-year fixed-rate conventional mortgages are the most common, you can find other terms (like 15- or 20-year loans) as well as adjustable-rate mortgages. Since lenders don’t have to stick to government-prescribed programs, they can create more options.
- Low-interest rates
- Fast loan processing
- Diverse down payment options
- Various term lengths on a fixed-rate mortgage, ranging from 10 to 30 years
- Reduced private mortgage insurance (PMI)
CRITERIA OF
ELIGIBILITY
Conventional loan requirements vary by lender. But most conventional loans have to meet basic guidelines set by Fannie Mae and Freddie Mac. These include:
- Check your credit score. Before you do anything else, it’s important to know where your credit stands. You can do this by checking your credit score for free with Experian. If your credit score is 620 or higher, you’ll have a chance to get approved for a conforming conventional loan. And if it’s in the mid- to upper-700s, you’ll have a better chance of qualifying for favorable terms on your new loan.
- Save for a down payment. While many conventional loans don’t require a big down payment, the more money you put down, the better your chances of qualifying for a lower interest rate.
- Check your debt-to-income ratio. In addition to reviewing your credit score, lenders will look at your DTI. Lenders typically want to see that your total monthly debts are no more than 36% of your monthly gross income. Lenders may stretch their required DTI to 43% or higher in some cases, but the maximum Fannie Mae and Freddie Mac will allow for conforming loans is 50%.
- Research mortgage lenders. Take some time to look at different mortgage lenders, including what rates they’re offering, how the application process works and whether you can do it online. Try to find at least three to five lenders you like before applying.
- Get pre approved. A mortgage pre-approval is a letter from a mortgage lender effectively agreeing to lend you up to a certain amount of money to buy a home, as long as you meet certain conditions. During this process, the lender or broker will let you know whether you need to make other changes to improve your eligibility to buy a home.
The conventional loan amount also has to be within conforming loan limits: up to $647,200 in most areas, but more in some high-cost areas. These are reevaluated by the Federal Housing Finance Agency (FHFA) every year.