Stewart Brown Jr – Mortgage Loan Originator – Purchase or Refinance
| Conventional Loans make up the majority of the mortgage market at approximately 64%. These types of loans are primarily for borrowers with higher credit scores and minimal credit issues. There’s also a myth that you need to have a 20% down payment. 20% is what you will need to put down only to avoid PMI or private mortgage insurance. The lowest down payment is actually 3%. These loans are dictated by guidelines set by two government sponsored entities, Fannie Mae & Freddie Mac. Lenders underwrite to their rules and then sell their loans to one of these entities as a mortgage-backed security. Finally, these loans can be used for not only a Primary owner occupied residence, but as for second homes or investment properties. |
| Conventional Loans make up the majority of the mortgage market at approximately 64%. These types of loans are primarily for borrowers with higher credit scores and minimal credit issues. There’s also a myth that you need to have a 20% down payment. 20% is what you will need to put down only to avoid PMI or private mortgage insurance. The lowest down payment is actually 3%. These loans are dictated by guidelines set by two government sponsored entities, Fannie Mae & Freddie Mac. Lenders underwrite to their rules and then sell their loans to one of these entities as a mortgage-backed security. Finally, these loans can be used for not only a Primary owner occupied residence, but as for second homes or investment properties. |
| The down payment on a Conventional loan can be as low as 3%, if you are a first time home buyer or have a co-applicant that is. In addition, if you’re using Fannie Mae’s HomeReady or Freddie Mac’s HomePossible programs your income can not exceed 80% of the AMI or area median income. Otherwise, the standard down payment is 5%. Also, if you are purchasing a property that is not a single family residence, meaning it has 2-4 units you may need to put down up to 15%. If you’re purchasing a second home the minimum down payment is 10% and if you are obtaining an adjustable rate mortgage the minimum is 5%. Down payments are verified through 2 months of bank statements, gift funds, or a 401k loan. |
| The down payment on a Conventional loan can be as low as 3%, if you are a first time home buyer or have a co-applicant that is. In addition, if you’re using Fannie Mae’s HomeReady or Freddie Mac’s HomePossible programs your income can not exceed 80% of the AMI or area median income. Otherwise, the standard down payment is 5%. Also, if you are purchasing a property that is not a single family residence, meaning it has 2-4 units you may need to put down up to 15%. If you’re purchasing a second home the minimum down payment is 10% and if you are obtaining an adjustable rate mortgage the minimum is 5%. Down payments are verified through 2 months of bank statements, gift funds, or a 401k loan. |
| 620 is the minimum credit score permitted by all lenders to qualify for a conventional loan. 740 is the highest score you would need to get the best rate on a conventional loan. 2 years+ of credit history is preferred but not always necessary. Also, if you have zero credit or no credit you may still qualify. You can use tradelines to show creditworthiness such a rent or utility payments. Important derogatory credit events to be aware of are a deed in leui of foreclosure or short sale where you will need to wait 4 years before obtaining mortgage financing, a foreclosure would be 7 years, a chapter 7 bankruptcy would be 4 years and a chapter 13 bankruptcy would be 2 years from discharge or 4 years from the dismissal. |
| 620 is the minimum credit score permitted by all lenders to qualify for a conventional loan. 740 is the highest score you would need to get the best rate on a conventional loan. 2 years+ of credit history is preferred but not always necessary. Also, if you have zero credit or no credit you may still qualify. You can use tradelines to show creditworthiness such a rent or utility payments. Important derogatory credit events to be aware of are a deed in leui of foreclosure or short sale where you will need to wait 4 years before obtaining mortgage financing, a foreclosure would be 7 years, a chapter 7 bankruptcy would be 4 years and a chapter 13 bankruptcy would be 2 years from discharge or 4 years from the dismissal. |
| Rates on conventional loans are the most ubiqitious of all mortgage rate reportings. These rates have averaged about 7% over the long term, however they have seen wide swings over the years. Mortgage rates reached an all time high in October 1981 when they reached almost 19% and an all time low in January 2021 when they bottomed out at 2.875%. There are many factors that affect mortgage rates on the macro level, including the Federal Reserve, the bond market, the health of the economy, inflation, the SOFR or secured overnight financing rate, and the CMT or Constant Maturity Treasury Rate. Factors that affect mortgage rates on a micro level are your personal credit score, down payment, loan to value and occupancy classification. |
What kind of interest rate will I have to pay on a Conventional Loan?
What kind of interest rate will I have to pay on a Conventional Loan?
| Rates on conventional loans are the most ubiqitious of all mortgage rate reportings. These rates have averaged about 7% over the long term, however they have seen wide swings over the years. Mortgage rates reached an all time high in October 1981 when they reached almost 19% and an all time low in January 2021 when they bottomed out at 2.875%. There are many factors that affect mortgage rates on the macro level, including the Federal Reserve, the bond market, the health of the economy, inflation, the SOFR or secured overnight financing rate, and the CMT or Constant Maturity Treasury Rate. Factors that affect mortgage rates on a micro level are your personal credit score, down payment, loan to value and occupancy classification. |
| There is no required upfront mortgage insurance on a conventional loan unlike an FHA, VA or USDA loan. PMI or private mortgage insurance is only required if you are putting less than 20% down. Keep in mind however, if you have an existing loan that has PMI on it and your LTV or loan to value reaches 80%, PMI will not automatically fall off, you will need to request it from your lender. Otherwise, it falls off automatically at 78% LTV. Also, PMI is calculated based off of the risk of the borrower looking at the credit score and their debt to income ratio. The range in cost is usually around .5 – 1% annually of the loan amount. |
| There is no required upfront mortgage insurance on a conventional loan unlike an FHA, VA or USDA loan. PMI or private mortgage insurance is only required if you are putting less than 20% down. Keep in mind however, if you have an existing loan that has PMI on it and your LTV or loan to value reaches 80%, PMI will not automatically fall off, you will need to request it from your lender. Otherwise, it falls off automatically at 78% LTV. Also, PMI is calculated based off of the risk of the borrower looking at the credit score and their debt to income ratio. The range in cost is usually around .5 – 1% annually of the loan amount. |
| The loan limit for 2022 is $647,200 for most areas. That’s an increase of $98,950 from 2021. The loan limit is $970,800 in Alaska, Hawaii, Guam and the U.S. Virgin Islands. However, this amount can vary based on if you live in a high cost county. If you live in California, Colorado, Connecticut, Washington D.C., Florida, Idaho, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Tennessee, Utah, Virgina, Washington, West Virginia or Wyoming your loan limit would be somewhere between $647,200 and $970,800 so it’s best to check your county’s loan limit. Loan limits are also higher for 2, 3 and 4 unit properties. There are several resources online to check these specifics and also in the description of this video. |
| The loan limit for 2022 is $647,200 for most areas. That’s an increase of $98,950 from 2021. The loan limit is $970,800 in Alaska, Hawaii, Guam and the U.S. Virgin Islands. However, this amount can vary based on if you live in a high cost county. If you live in California, Colorado, Connecticut, Washington D.C., Florida, Idaho, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Tennessee, Utah, Virgina, Washington, West Virginia or Wyoming your loan limit would be somewhere between $647,200 and $970,800 so it’s best to check your county’s loan limit. Loan limits are also higher for 2, 3 and 4 unit properties. There are several resources online to check these specifics and also in the description of this video. |
What are the income & employment requirements for a Conventional Loan?
| Conventional loans want at least a 2 year history of stable employment. There is no set length of time at a specific job that is required. However, what’s most important to your lender is that you are in the same line of work over the last several years. You will usually need to provide the last two years of all your W-2 statements and your paystubs from the last 30 days. If you are self employed you will most likely need to provide your last two years Federal tax returns with all schedules along with a year to date profit and loss statement. If you are retired, your lender will most likely want a copy of your social security or pension award letters. |
What are the income & employment requirements for a Conventional Loan?
| Conventional loans want at least a 2 year history of stable employment. There is no set length of time at a specific job that is required. However, what’s most important to your lender is that you are in the same line of work over the last several years. You will usually need to provide the last two years of all your W-2 statements and your paystubs from the last 30 days. If you are self employed you will most likely need to provide your last two years Federal tax returns with all schedules along with a year to date profit and loss statement. If you are retired, your lender will most likely want a copy of your social security or pension award letters. |
| To manage risk your lender will look at your Debt to income ratios. For conventional loans there is no front end ratio requirement only a 49.99% back end ratio maximum. To clarify, front end would only cover your mortgage payment, whereas back end would encompass your mortgage and all other monthly debt obligations. This is determined by taking your monthly gross income and multiplying it by .4999. This amount will need to include not only your projected monthly mortgage payment of principal, interest, taxes, insurance and Home owners association dues or PITIA but also your monthly payment obligations for other debt including credit cards, car loans, student debt, etc. that is reported on your credit report. |
What is the highest Debt to Income Ratio Permitted on Conventional Loans?
What is the highest Debt to Income Ratio Permitted on Conventional Loans?
| To manage risk your lender will look at your Debt to income ratios. For conventional loans there is no front end ratio requirement only a 49.99% back end ratio maximum. To clarify, front end would only cover your mortgage payment, whereas back end would encompass your mortgage and all other monthly debt obligations. This is determined by taking your monthly gross income and multiplying it by .4999. This amount will need to include not only your projected monthly mortgage payment of principal, interest, taxes, insurance and Home owners association dues or PITIA but also your monthly payment obligations for other debt including credit cards, car loans, student debt, etc. that is reported on your credit report. |
| Seller credits are how much the seller can give you towards your closing costs. This is all negotiated in your contract up front and should be reviewed with your Realtor. Depending on how much you are putting down determines how much you can ask for in seller credits. If putting down less than 10%, the maximum you can ask for is 3%. If putting 10% to less than 25%, the maximum you can ask for is 6%. If greater than 25% down, then you can ask for a maximum of 9%. If you’re looking at an investment property that maximum seller credit regardless of down payment is 2%. As a reminder, these would all be part of your initial offer when purchasing a property. |
| Seller credits are how much the seller can give you towards your closing costs. This is all negotiated in your contract up front and should be reviewed with your Realtor. Depending on how much you are putting down determines how much you can ask for in seller credits. If putting down less than 10%, the maximum you can ask for is 3%. If putting 10% to less than 25%, the maximum you can ask for is 6%. If greater than 25% down, then you can ask for a maximum of 9%. If you’re looking at an investment property that maximum seller credit regardless of down payment is 2%. As a reminder, these would all be part of your initial offer when purchasing a property. |
| Unlike government loans such as FHA, VA and USDA there is no streamline option when it comes to refinancing a conventional loan. What this means is that when you refinance you will need a new appraisal, your credit will need to be ran, you will need to resupply fresh income documents, and you will need to undergo full underwriting. There are also two options available when refinancing. There is a limited cash out refi which is essentially an adjustment to the rate and or term and a cash out refi is used primarily to pull out equity as a lump sum but can also be used to lower your interest rate or term. |
| Unlike government loans such as FHA, VA and USDA there is no streamline option when it comes to refinancing a conventional loan. What this means is that when you refinance you will need a new appraisal, your credit will need to be ran, you will need to resupply fresh income documents, and you will need to undergo full underwriting. There are also two options available when refinancing. There is a limited cash out refi which is essentially an adjustment to the rate and or term and a cash out refi is used primarily to pull out equity as a lump sum but can also be used to lower your interest rate or term. |
Are there any special features on Conventional Loans I should be aware of?
| There are several special features to be aware of when it comes to conventional loans. Conventional loans tend to be easier for foreclosed homes. Also, you could get an appraisal waiver if you have a high enough credit score and are putting 20% or more down. Although, not all homes qualify. An appraisal waiver or PIW (Property Inspection Waiver) speeds up the mortgage process considerably. Instead of a 30 day close of escrow you might only be looking at 15 days. Another special feature is if you obtain an appraisal and it comes in low, you can switch lenders and get a new appraisal. Unfortunately, with an FHA loan your appraisal stays with the property for 4 months regardless of lender. There’s also a HomeStyle Renovation loan option similiar to the FHA 203k loan which allows you to finance in renovation costs. |
Are there any special features on Conventional Loans I should be aware of?
| There are several special features to be aware of when it comes to conventional loans. Conventional loans tend to be easier for foreclosed homes. Also, you could get an appraisal waiver if you have a high enough credit score and are putting 20% or more down. Although, not all homes qualify. An appraisal waiver or PIW (Property Inspection Waiver) speeds up the mortgage process considerably. Instead of a 30 day close of escrow you might only be looking at 15 days. Another special feature is if you obtain an appraisal and it comes in low, you can switch lenders and get a new appraisal. Unfortunately, with an FHA loan your appraisal stays with the property for 4 months regardless of lender. There’s also a HomeStyle Renovation loan option similiar to the FHA 203k loan which allows you to finance in renovation costs. |
| Fannie Mae’s HomeReady and Freddie Mac’s HomePossible conventional loan programs allow credit worthy low income borrowers the ability to purchase a home with only 3% down. They also allow borrowers to receive lower rates and pay lower mortgage insurance than a standard conventional loan. The maximum income requirement is 80% of the AMI or area median income. You can find your specific locations area median income by visiting www.ami-lookup-tool.fanniemae.com. A homebuyer course is required under these programs which can usually be done online. The course is usually free but can be time consuming and provide little real value. Another positive feature is that you don’t need to be a first time home buyer either. |
| Fannie Mae’s HomeReady and Freddie Mac’s HomePossible conventional loan programs allow credit worthy low income borrowers the ability to purchase a home with only 3% down. They also allow borrowers to receive lower rates and pay lower mortgage insurance than a standard conventional loan. The maximum income requirement is 80% of the AMI or area median income. You can find your specific locations area median income by visiting www.ami-lookup-tool.fanniemae.com. A homebuyer course is required under these programs which can usually be done online. The course is usually free but can be time consuming and provide little real value. Another positive feature is that you don’t need to be a first time home buyer either. |
Current Conventional Rates
When you’re researching current Conventional mortgage rates, you’ll likely see variations from one lender to another. Interest rates differ because lenders price their loans differently. It’s helpful to have an idea of average rates over time to help understand Conventional loan interest rates. The historical rates below are national averages provided by a third party company.
Reach out to me for further detailed information on conventional loan programs.