If you have a solid credit score and are looking to buy a home, a conventional loan is your best option.
While FHA loans are guaranteed by HUD and VA loans by the Veterans Administration, conventional loans are guaranteed by Fannie Mae or Freddie Mac, posing fewer hurdles. It’s easier to get approved, plus they offer better terms, allowing more flexibility and options.
Fannie Mae is a GSE (Government Sponsored Enterprise) committed to increasing liquidity and making loans more widely available by purchasing mortgages from lenders and selling them to investors.
Conventional loans can help you save money in the long-term because of the following, which makes them very popular in the US:
- Lower mortgage insurance costs and rates based on credit rating.
- Ability to finance multiple properties, including vacation homes, rentals or investment properties.
- Down payment as low as 3%
- You can lower your mortgage payments by paying 20%, eliminating PMI.
Here are the typical conventional loan requirements, including factors impacting mortgage rates and why Supreme Lending is your best option for the best on-time mortgage loans in Texas.
Typical Conventional Loan Requirements
1. Credit Score
Your credit score is a numerical calculation based on information like owed amounts, loan payment punctuality, any new credit you’ve asked for recently, and how long you’ve had credit on your credit report. It helps predict your likeliness to repay a loan and make the payments in a good time.
Credit scores usually fall between 300 and 850. The higher the score, the better. A high score means you have good credit and are less likely to default in paying a loan.
For you to get a conventional loan in Texas, your score should be above 620. If your credit score is higher, you may enjoy a lower down payment requirement and lower interest rates.
Although there are several credit scoring systems, the FICO score is the one used most. Unlike an annual credit report, which is free, you need to pay to get a credit score. However, good credit history means your credit score is good, and vice versa, since your credit score is based on what’s in your credit history.
2. Debt-To-Income Ratio
The DTI ratio is a numerical calculation obtained by dividing your total monthly debt by your total monthly income before tax to compare how much debt you’re currently carrying against how much you earn. If there’s already a significant percentage of your annual earnings set aside to pay existing debts, your chances of obtaining a loan will be slimmer.
There are two ways to calculate your DTI:
- Front-End (or housing expense) ratio: This compares your gross monthly income to your overall housing expenses: your monthly rent or principal and interest payments on your home mortgage, real estate taxes and insurance premiums.
- Back-end ratio: Like the front-end ratio, this compares your gross monthly income to your overall housing expenses. But in addition to the overall housing expenses, it includes some other debts such as auto loans, personal loans, student loans, alimony support and credit card balance that show up on your credit report.
The lower the DTI, the better. A lower DTI means there’s more room in your budget to afford to pay a loan. It’s best for a conventional loan that your DTI doesn’t exceed 45% to increase the chances of being approved.
3. Down Payment
The down payment is a percentage of the sales price a buyer must pay from their retirement portfolio, inheritance, a stock fund or bank account. It can often be confused for earnest money, a deposit made on the home you intend to purchase when you submit an offer to show your seriousness about your intention to buy the house.
Down payment requirement varies based on:
- If it’s for a primary or secondary home
- Loan type (Conventional, VA, jumbo, FHA)
The minimum down payment for conventional loans is 3%. However, the higher the down payment you make, the smaller the monthly mortgage payments you’ll make. That said, waiting to make a higher down payment of say 20% is counterproductive because it could take years to accumulate that amount; the time you could be building equity. Also, within that time, prices could go up.
Because the down payment required for conventional loans is less than 20%, private mortgage insurance is required.
Mortgage insurance can be paid in the following ways:
- A lump sum when closing
- Built into the mortgage rate
- Monthly with the mortgage
Generally, the lower your credit score and the smaller the down payment you make, the higher your PMI rate will be.
5. Stable Income
Your income helps gauge your ability to repay a loan. No matter how impeccable your credit is, you’ll still need to prove that you have your income is sufficient to cover your monthly mortgage payments.
When it comes to income, standards vary since borrowing is not limited to one lender. For example, with some lenders, a college graduate can qualify for a loan after earning a single salary.
Although the Federal National Mortgage Association and the Federal Home Loan Corp have an extensive list of income documentation you’ll be required to fill out, they’re flexible. For example, a relationship with a bank that knows your history and says you’re a suitable candidate can enable you to secure a mortgage even if you don’t meet every standard requirement.
6. Maximum Conforming Loan Amount
Conforming loan limits for Texas are set by the Federal Housing Finance Agency (FHFA).
In 2020, the Texas conventional loan limits rose to $510,400 from $484,350 in 2019 for a single-family home, although higher caps apply for multi-family properties.
What Affects Mortgage Rates?
Besides your financial history and the home you want to buy, movements in the U.S. housing market and the global economy also impact mortgage rates, which is why they keep fluctuating. These two influencers can be broken down into the following factors:
- Economy: The financial state worldwide drives all interest rates, mortgage rates included.
- Property Location: State laws can affect mortgage rates by driving up lender costs to keep the rates down.
- Lender pipeline: The rates a lender provides can be influenced by the amount of business they’re handling.
- Home use: The purpose you’re using the home for – primary residence, vacation home or rental.
- Credit score: The better the credit score, the lower the interest rate.
- Loan features: Different loan features, such as term and rate adjustment, can affect mortgage rates.
- Points: Discount points offered when you pay more upfront can lower the mortgage rate.
- Loan amount: Very low or very high loan amounts can make rates shoot up.
- Loan-to-value: Borrowing a smaller amount and putting a higher down payment will most likely get you a better rate.
Get Your Dream Home at the Best Loan Rates in Texas!
Go ahead and start realizing your dream of owning a home. Whether you intend it for your primary residence, vacation home or rental, Supreme Lending knows how to get you there. We have over 20 years of experience in serving Texas with home loans and a team dedicated to helping you meet your long-term mortgage and financial objectives. Get started today with Supreme Lending!