The days of zero-down-payment loans and no-income-verification loans are long gone -- people applying for a conventional mortgage now need three basic elements to qualify: cash, good credit and income.
Conventional mortgages are "plain vanilla" home loans. They follow fairly conservative guidelines for:
●Borrower credit scores
●Minimum down payments
●Debt-to-income ratios (Percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support)
Conventional mortgage loans usually require a minimum down payment of 5 percent, with 10 percent required on condominium purchases. Borrowers who need to finance more than the conforming loan amount of $417,000 will need a higher credit score of 700 or above and a larger down payment.
While it is possible to get a conventional loan with a credit score as low as 620, the interest rate will be higher because of the added risk of the low credit score, However, with a score of 620 or less you will need to make a down-payment of at least 20 percent because you can’t qualify for mortgage insurance with a credit score of 620.
Conventional loan programs usually require the borrower to have at least three months’ of cash reserves after closing. Lenders can require as much as 12 months' cash reserves depending on the loan size, amount of down payment and your credit score.
You will also need to prove your income and assets with current pay stubs, W-2 forms, bank statements and job histories. If you are a 1099 contractor or are self-employed, you will need to provide two years of tax returns.
In English, all of this means a conventional loan is very good for those of us with a 700 or higher credit score, money in the bank for a 10-20 percent down payment, closing cost, and at least 2 years of job history with W2s and tax returns that do not show large losses for the past 2 years.
The benefit of having all of these things in order is a lower interest rate over the term of your loan. For those of you in this position, a conventional loan is waiting for you. And for those who do not, there are programs available with down payment assistance such as LIPA (Low Income Purchase Assistance). There are programs to fit every borrower; you just need to work with the right real estate and lending professionals.
At WLM Financial, our goal and my dream is to teach people how to get in the position to be financially free, and with a little bit of hard work and endurance you can get there.