WHAT IS CONVENTIONAL FINANCING?
A conventional loan is a home loan that is not guaranteed or insured by any government agency, these include the Federal Housing Administration (FHA), (USDA rural housing) administered by the Farmers Home Administration, and the VA loan administered by the Department of Veterans Affairs. The loan can be a fixed rate and term or adjustable rate.These loans include:
- Conforming loans
- Non-conforming loans
- Jumbo Loans
- Portfolio Loans
WHAT IS ENTITLEMENT
With these different loan types about half of all conventional loans that close are conforming loans. Conforming loans have guidelines that are set by one of two agency’s Fannie Mae or Freddie Mac. At the current time, these agencies are overseen by the government. They buy all conforming mortgages and then sell them to investors on what is called the secondary market. By setting guidelines they make conforming loans easier to be accessed by the public.
How do I qualify for a conventional loan?
Lenders are always going to look many factors the three major ones are credit, income and assets.
Credit scores need to be over 620. You must be 7 years clear from the title transfer on a foreclosure and 4 years clear of the discharge date of a Chapter 7 bankruptcy
Income needs to be considered stable and have a likely hood to continue. Self-employed will typically need to provide 2 years of tax returns to calculate the income. Commissioned or other variable income types will also typically require a 2-year history. Hourly employees will need to show a work history of 2 years with no large gaps of employment
Debt to Income:
If a lender deems your income stable they will use this income to calculate a debt to income ratio. A debt to income ratio is a calculation of your monthly income vs. your monthly reoccurring debts that appear on the credit report as well as any spousal/child support, a federal tax payment plan, any monthly payments on judgements. The typical loan will need to have a total debt to income ratio of lower than 45% there are times it can go as high as 50%.
Fannie Mae has rolled out a first-time home buyer program that will allow for a down payment of 3%. All other loans will be required to bring in at least a 5% down payment. If a borrower has less than 20% equity in the property they will be required to pay mortgage insurance. Mortgage insurance is default insurance for the lender so in other words if you were to stop making payments the lender can make a claim to get a portion of your loan from the insurance company.