If you have a high credit score and some money to put down on a house, you may want to consider using a conventional loan to purchase a new home. A conventional loan is not backed by an organization and is slightly harder to get than other types, but it offers excellent terms to people who qualify.
Here are several vital things to understand about conventional loans.
You Need Good Credit
Because there is no authority backing a conventional loan, lenders have more risks when issuing them. The result of this is that the guidelines are stricter for borrowers. To meet the eligibility guidelines, you will need good credit. Good credit is usually a score that is around 740, but some lenders may make exceptions to this. Good credit matters to lenders because of the added risks they have when offering conventional mortgages.
If you meet this score requirement but have a bankruptcy or foreclosure in your past, you may have to wait a few years before you qualify. For a conventional loan, you cannot have a bankruptcy on your record within the last three to five years.
You Need a Down Payment
Next, you will need a down payment. Some lenders that offer conventional loans allow buyers to purchase homes with only 3.5% down, but this is the minimum. You will need at least this amount for your down payment. For example, if you want to purchase a house for $200,000, your down payment requirement would be $6,000. To find out the amount you need, ask a lender.
You May Have Private Mortgage Insurance
Conventional loans do not require paying funding fees, but there are times when borrowers must pay private mortgage insurance (PMI). PMI is insurance that protects the lender of the mortgage. When you buy PMI, the lender has an insurance policy that reimburses them if you default.
With a conventional loan, you can avoid the PMI by putting a 20% down payment on the property when you purchase it. For a house that is $200,000, you would need to put $40,000 down. If you can put 20% down, you will not have to pay this extra expense, as your lender would not require it.
Do you have questions about home loan purchases? If you do, the best thing you can do is contact a lending institution to speak to a loan officer about your questions or concerns.