When purchasing a new home, many buyers turn to a conventional mortgage for financing. A conventional loan is currently the most popular type of mortgage in the United States, with Ellie Mae reporting that three out of five buyers use this type of loan to purchase or refinance at home. But, what are conventional home loan requirements?
Down Payment
The down payment requirement for a conventional loan varies depending on the property and the specific loan in question. For example, first-time homebuyers can get a conventional mortgage with a down payment of as little as 3%. A person who is not a first-time homebuyer will be required to pay at least 5%, while those purchasing a second home must put down at least 10%.
If a residential property is not a single-family home and contains more than one unit, buyers may be required to put down 15%. The down payment requirement for an adjustable rate mortgage is 5%. Meanwhile, those getting a jumbo loan will be required to put down anywhere from 20 to 40%. Putting down a larger percentage as a down payment will generally translate into lower monthly mortgage costs.
Private Mortgage Insurance
A borrower who puts down less than 20% on a conventional home loan will be required to pay private mortgage insurance, or PMI. This protects the lender in the event that the borrower defaults on their loan, and its cost varies depending on the type of loan in question as well as the borrower’s credit score and down payment. Private mortgage insurance is generally paid with the monthly mortgage payment. However, some buyers choose to pay it as an upfront fee or cover it in the form of a modestly higher interest rate.
However, it is important to note that PMI is required throughout the lifetime of the loan. Once a borrower has reached 20% equity in the home on their regular mortgage payment schedule, they have the option of requesting that the lender remove the PMI from their mortgage payments. Should an increase in the home’s value allow a homeowner to reach 20% equity, they can ask the lender for a new appraisal that can be used to recalculate their PMI requirement. When equity in the home has reached 22%, the lender will automatically remove the loan’s PMI.
Documents Required For A Conventional Loan
Before a conventional loan is approved, mortgage lenders will request a series of documents in order to gain a thorough understanding of the borrower’s financial situation.
Proof Of Income
Proof of income is an important part of determining a borrower’s eligibility for a conventional home loan. Mortgage lenders will ask to see a borrower’s pay stubs; those who are self-employed or have other sources of income, like child support, might need to show proof in the form of 1099s or direct deposits.
Tax returns for the past year or two may also be requested by the lender to ensure that a borrower’s yearly income is consistent with the earnings indicated by the pay stubs provided and confirm that income does not fluctuate too dramatically from year to year.
Verification Of Employment
Mortgage lenders typically verify a borrower’s employment by contacting their employer directly and reviewing their recent income documentation. This will not take place until after the borrower has signed a form authorizing their employer to release this information to the prospective lender.
Lenders may ask other questions when verifying employment to assess the likelihood that the borrower will remain employed in the foreseeable future. They may also verify the applicant’s salary, history and position. In the case of borrowers who have been with their current company for less than two years, the lender might also confirm previous employment details.
Identification and Credit Verification
A credit report will also be used by a lender to assess potential borrowers. The minimum credit score required for most conventional loans is 620. Although borrowers may be approved with a slightly lower credit score, the lender may charge them a higher interest rate in order to compensate for the greater risk they pose. Those who have lower credit might consider an FHA loan, a type of loan that is geared toward helping those with lower credit scores get on the property ladder.
If there are any negative items on a person’s credit report, the lender may ask the applicant to explain them in writing. In some cases, the lender may be willing to overlook a one-time unavoidable circumstance, but habitual delinquency could compromise the application. Lenders will also need some proof that the applicants are who they claim to be. This may come in the form of a photo ID, driver’s license or other form of photo identification.
Talk To Conventional Loan Experts About Conventional Home Loan Requirements
If you are interested in taking out a conventional loan and need to know the conventional home loan requirements to finance the purchase of a new home, get in touch with the conventional loan experts at My Lending Pal to find out more about how they can help you purchase the home of your dreams.
