FHA loans, USDA mortgages, and even VA loans require an upfront insurance fee, usually between 1% and 4% of the loan amount.
Conventional loans only require a monthly mortgage insurance premium, and only when the homeowner puts down less than 20 percent.
Plus, conventional mortgage insurance may be lower than that of government loans if you have good credit and a decent down payment.
A lot of home shoppers think it’s too hard to qualify for a conventional mortgage, especially if their financial situations aren’t perfect. But that’s not really the case.
- You make enough money to cover monthly payments
- Your income is expected to continue
- You have funds to cover the required down payment
- You have a good credit history and decent score
True, the standards to qualify for a conventional loan are slightly higher than for an FHA or VA loan. But they’re still flexible enough that most homebuyers are able to qualify.
Credit score
According to loan software company Ellie Mae, the average credit score for all applicants who successfully complete a mortgage is around 720. This is plenty high to get approved for a conventional loan.
“We want to know that people pay their bills on time and are financially disciplined and good at money management,” says Staci Titsworth, regional vice president sales manager with PNC Mortgage in Pittsburgh, PA.
A slightly lower credit score may pass the credit score test, but the lender will typically charge a higher interest rate to compensate for the greater risk.
Applicants with lower credit may want to choose an FHA loan, which does not charge extra fees or higher rates for lower credit scores.
Employment and income
During the mortgage application process, home buyers must provide proof of earnings, which may involve some or all of the following documentation:
- 30 day’s pay stubs
- 2 year’s W2s
- 2 year’s tax returns if self-employed
- An offer letter , if not yet started
- Proof of education for new graduates
Alimony can also be counted if documented in a divorce decree, along with the recurring method of payment such as an automatic deposit.
Property value
A lender won’t approve a mortgage for an amount that’s greater than the value of the home. Before closing on the loan, the lender will appraise the property to determine its value.
As an example, let’s say the buyer has agreed to pay $200,000 for a home but the appraisal comes in at $190,000.
In this case, the home buyer should use this appraisal as a bargaining chip to get the seller to lower the price to a level the lender will finance.
Or, the buyer could pay the additional webpage $10,000 out of pocket to compensate for the lower borrowing limit. This $10,000 would be added to the down payment you’d already agreed to pay.
For instance, if you were putting 20% down on the $200,000 home, that’s $40,000. But the appraised value is $190,000. You would be required to put down 20% of the new value – $38,000 – plus the $10,000 shortfall in value, for a total of $48,000.
“If the appraiser sees water stains or a lot of leaky faucets, he may request a plumbing inspection. The seller may need to make improvements, which could delay a closing,” Titsworth says.
This is another advantage to conventional: You can qualify for a home in slightly worse condition and plan to make the repairs after your loan is approved and you move in.
Down payment
A down payment of at least 20% will also eliminate conventional mortgage insurance. By contrast, FHA and USDA loans require mortgage insurance regardless of how much money you put down.