Five Conventional Mortgage Requirements to Consider When Buying a Home
A conventional mortgage is one underwritten by Freddie Mac and Fannie Mae, which means that they create the rules and regulations associated with these products. Most conventional loans require higher down payments and solid credit worthiness. The federal oversight for these programs comes from the US Department of Housing and Urban Development (HUD).
Most conventional mortgage products require a minimum down payment of 5 percent of the purchase price of a home. In a refinance, the 5 percent equity rule is applicable as well. A borrower must have a minimum of 5 percent equity in the home to be able to refinance a conventional mortgage. Additionally, a higher down payment may be required if the borrower has a credit score below 620. This down payment requirement may be as high as 20 percent.
PMI: Private Mortgage Insurance
PMI or private mortgage insurance is charged to a borrower when he has less than 20 percent equity in the residence. This insurance covers the lender in the event that the borrower defaults on the debt. Therefore, the only benefiting party in the transaction is the lender. To avoid this fee, a borrower must either make a down payment of 20 percent or more, or procure subordinate financing to cover the needed funds.
Credit score requirements for conventional mortgages vary by lender; however, in most cases the minimum credit score for a conventional mortgage is 620. Some lenders, however, will underwrite mortgages with credit scores as low as 580; it is simply up to each lender as to what score is the cutoff. A borrower with a lower credit score is considered to be a higher risk than a borrower with a higher credit score.
A borrower’s credit report is reviewed by the lender to determine his ability and willingness to repay a new mortgage debt. If the borrower has any liens or judgments on his credit report, they must be paid in full prior to procuring a conventional mortgage. Additionally, conventional mortgage requirements state that a borrower must be a minimum of two years discharged or dismissed from a bankruptcy in order to qualify for the new debt. Last, any late payments on a current mortgage of 30 days or later in the previous 12 months automatically disqualifies a borrower from a conventional mortgage, even if other requirements are met.
Debt to Income Ratio
The debt to income ratio is used by lenders to quickly determine the amount of a borrower’s income that is strictly dedicated to debt repayment. The higher the debt to income ratio, the more likely the borrower is over his head in debt. The preferred debt to income ratio for most conventional mortgage companies is less than 30 percent, although with certain situations lenders will qualify a borrower with a ratio up to 40 percent. This is a lender to lender decision and case-by-case situation, however.