Conventional Loan Guidelines
In this guide on Gustan Cho Associates, we will cover and go over the basics of conventional loan guidelines. In this Blog, we are going to dive into Conventional Mortgages. We will discuss exactly what a conventional mortgage is, the requirements of conventional mortgages, as well as how to apply. You may often hear the term QM or qualified mortgage, or conforming loan when talking about a conventional mortgage. So, don’t be confused if they are referred to as something other than a conventional mortgage.
What Is a Conventional Loan?
When beginning the home-buying process, the first step is to get pre-qualified. When you reach out to lenders, the terms conventional mortgage or conventional loan will be most likely the first thing offered to you. That is because the conventional mortgage is the most common mortgage product within the marketplace.
Conventional Versus Government Loans
As lenders, it is our responsibility to provide you with the best mortgage program that fits your credit profile and your needs as a consumer. Conventional mortgage loans are usually recommended to clients with a strong credit history, and who have the ability to put down a good amount of money. The reason Conventional loans are geared toward those types of clients is that, unlike FHA, VA, and USDA loans, Conventional Loans are not backed by the Federal Government.
For a client to be recommended for a conventional loan, the mortgage will likely meet the requirements of Fannie Mae or Freddie Mac in regards to the amount of money down and provable income of the borrower. It will also conform to the loan limits set forth by the FHFA or the Federal Housing Finance Administration.
Fannie Mae Conventional Loan Guidelines
As we mentioned before, Conventional Mortgages are for consumers with a solid credit history. That is the first requirement of a conventional mortgage. When being offered a conventional mortgage, the lender will review your credit history and confirm that your credit score is above a 620 FICO. The down payment required for a conventional mortgage is based on the consumer’s credit score as well.
Applicants with a score over 740 will be able to put less money down. The minimum down payment requirement for a conventional loan is 3%. However, it is important to know, when using a conventional mortgage the applicant will be required to pay PMI insurance until the loan balance is below 80% of the appraised value. Debt To Income ratios or DTI is another factor when determining if you qualify for a conventional mortgage.
What Is The Conventional Loan Guidelines on Debt-To-Income Ratio
What is the debt-to-income ratio? This is a percentage used to determine your ability to repay the mortgage based on the monthly payment. The debt-to-income ratio is found by taking all of your monthly debts and dividing that number by the applicant’s gross monthly income. Ideally, lenders will look for a maximum ratio of 36% to qualify their clients for a conventional mortgage.
2023 Conventional Loan Guidelines on Loan Limits
Another requirement that we briefly touched on was the conforming limits of a conventional mortgage. In order to qualify for a conventional mortgage the loan amount must be less than $715,000 in most counties, however, there are certain counties that will allow a larger amount based on the cost of living.
For example, some high-cost cities in California or Hawaii will go up to $970,800.00. You would be surprised that most places applicants believe to be high cost, unfortunately, do not qualify for the exception.
Conventional Loan Guidelines
Now that we have discussed what a conventional mortgage is and the requirements to obtain this loan product, let us take a look at how this product fits in certain areas. When looking into Nevada, we first need to find out what the average credit score is by state. As of 2021, the average credit score in Nevada was 701 FICO. What does this information tell me?
Conventional Loan Guidelines on Down Payment on Home Purchases in Nevada
The average person looking to obtain a conventional mortgage in Nevada will likely have to put 15-20% down payment. The conforming loan limits for Nevada are $715,000.00 despite many homes on the market being offered for much more than that. As of this writing, there are 19,272 homes currently on the market in Nevada, with a median price of $469,000. This median price falls far below the conforming limit.
Conventional Loans in Nevada
Let’s take a look at Arizona to see how it compares to Nevada. As of September 2022, the average credit score in Arizona is 710, which is slightly higher than in Nevada. Unfortunately, it still falls short of the 740 credit score required to qualify for the minimum down payment allowed of 3%.
Conventional Loan Guidelines on Down Payments vs Mortgage Insurance
I would assume that the average down payment will be the same as those obtaining a conventional mortgage in Nevada at 15-20%. Similar to Nevada, the conforming limits for Arizona are $715,000.00. Despite increasing in value by over 13% over the last year, the average home price in Arizona is $432,850. Again like Nevada, that price falls well below the conforming loan limits set by the FHFA.
How To Apply and Get Pre-Approved For Conventional Loans
The application process is very simple. When you have decided to purchase a home, we strongly recommend you reach out to a lender to get pre-qualified. When choosing a lender to work with you want to make sure they have your best interest in mind.
