What Is A Conventional Mortgage

Q. What is a Conventional mortgage?

A. A conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity, such as the ;Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service, but instead is available through or guaranteed by a private lender (banks, credit unions, mortgage companies) or the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae)and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Q. What FICO score do I need?

A. Buyers with an established credit and who are on a solid financial footing should qualify for a conventional mortgage. The ideal candidate should have a credit score of at least 620 and, preferably, well over 700. The higher the score, the lower the interest rate on the loan, with the best terms being reserved for those over 740. FHA will back loans down to a credit score of 580, although most lenders require a minimum of 600 for FHA loans.

Q. What is a Debt To Income Ratio?

A. A debt-to-income ratio (DTI) is the sum of your monthly debt obligations divided by your monthly income giving you a percentage. Your monthly debt could include items such as car payments, minimum credit card payments on your credit report, student loans, and your proposed new house PITI (Principal & Interest of your mortgage, Taxes & Insurance).

This is the most important aspect of the Pre Approval that determines your “buying Power” or maximum a person may be approved for. Some conventional loans allow as high as a 50 DTI. FHA may allow up to a 57 DTI. For example, you are trying to purchase a home that exceeds your DTI, you would probably not qualify and would need to lower home search to a price range that falls within your Debt To Income ratio.

Q. How do I know what my down payment should be?

A. There is a misconception that a buyer must put down a minimum of 20% to purchase a home. Some lenders will offer a minimum down payment of as low as 3%, on conventional loans and 3.5% on FHA loans, and 0 down for VA Loans. One of the primary functions of a loan officer is to determine the best mortgage based on the buyer’s needs and financial circumstances.

Q. What is Private Mortgage Insurance (PMI)?

A. PMI is a type of mortgage insurance that buyers are typically required to pay for a conventional loan when they make a down payment that is less than 20% of the home’s purchase price. Many lenders offer low down payment programs, allowing you to put down as little as 3%. The cost of that flexibility is PMI, which protects the lender’s investment in case the purchase fails repay mortgage. The purchaser will make a monthly payment which is included in the monthly mortgage payment.

Q. What is an Adjustable Rate Mortgage (ARM)?

A. An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.

Q. What is the difference between a Pre Approval and a Pre Qualification?

Generally, A mortgage pre-approval is stronger than a Pre Qualification. A pre-approval should mean a loan officer and sometimes an underwriter, has reviewed your finances which includes your income, your debt, your assets and of course your credit history. This process will determine how much money you may borrow, how much you will pay per month and what your interest rate will be.

A Pre Qualification may be a non-binding process in which prospective borrowers provide preliminary information concerning income, debts, assets and credit to mortgage lenders. The lender will perform some basic calculations and then estimate your buying power.

The Pre Approval process is a very critical part when searching for a home. It is even more critical that you work with an experienced loan officer that will guide you through your home buying process. The ultimate goal of being Pre Approved is knowing that the home of your dreams is within your buying power.

Q. How much are my closing costs?

A. Typical closing costs and pre-paid expenses for a New Jersey home buyer is 2% to 3% of the purchase price.
The finalized amount of closing costs a buyer pays in New Jersey can vary due to a number of factors. Generally speaking a more expensive home will result in higher costs. But that’s just one variable that can affect the amount you pay to close on your home.

Q. Can I payoff my mortgage early with no penalty?

A. For many new mortgages, the lender cannot charge a prepayment penalty—a charge for paying off your mortgage early. If your lender can charge a prepayment penalty, it can only do so for the first three years of your loan and the amount of the penalty is capped.

Q. Is Conventional financing better than FHA financing?

A. There are several factors that go into determining which option is best for each person’s personal situation. Here a few of them…

Conventional mortgagesFHA loans
Minimum FICO credit scoreTypically, no lower than 620Typically, as low as 580
Minimum down paymentAs low as 3 percent, but 5 to 20 percent is more typicalAs low as 3.5 percent
Mortgage insuranceMonthly payments are required if you have a down payment of less than 20 percent, but generally
the insurance MAY be canceled when
your loan-to-value ratio reaches 80 percent.
Upfront and monthly payments, sometimes
for the duration of the mortgage term.

Q. What if I had a Bankruptcy or recent Foreclosure?

A. Once you’ve had a bankruptcy or a foreclosure there are certain “waiting periods” that must elapse before you may eligible for financing again.

Waiting Period After Bankruptcy
Conventional4 years4 years2 years from discharge date, or 4 years from dismissal date
FHA2 yearsN/A1 year
VA2 yearsN/A1 year
USDA3 yearsN/A1 year
Post-foreclosure waiting periods
Conventional2 or 4 years: If foreclosed property was discharged in bankruptcy
7 years: All other cases
FHA3 years
VA2 years
USDA3 years

Q. How long is the mortgage approval process?

A. In general: Mortgage underwriting can take anywhere from a few days to a few weeks. Five to eight business days is probably a good average (from the time the underwriter receives the file, up until a final determination is made).
In many cases, the underwriter will issue a conditional approval. This means he or she expects the loan to close, but needs to resolve one or more issues first. For example, the underwriter might need a letter of explanation (an “LOX” in industry jargon) about a recent bank deposit. Once this “condition” is cleared, the loan can move forward.
Some borrowers may not have any conditions. In those cases the mortgage underwriting process does not take as long. Other borrowers get one or more conditions they must resolve, before they are “clear to close.” Underwriting tends to take longer in these scenarios.

Have More Questions?

Contact Dean Scaduto from Guaranteed Rate Affinity NMLS #1598647, NMLS ID #275952 at 201-560-8304.

Dean Scaduto was a major contributor to this blog and he’ll be able to answer questions you may.