Rebecca Richardson - Mortgage Consultant
Dispelling the Myths of Conventional Loans
Let’s talk about conventional loans. Now, there might be a few different things you associate with conventional loans, like a 20% down payment or a credit score in the high 700s. These two ideas alone can make the homebuying process that much more daunting.
Now, let’s talk about what conventional loans actually are. A conventional loan is simply a mortgage loan that’s not backed by a government agency. That’s right, no 20% down payment; no perfect credit score requirement.
The Actual Requirements for a Conventional Loan
Getting a conventional loan isn’t as difficult as you might think it is. In fact, according to the National Association of Home Builders, conventional loans accounted for 78.5% of new home sales in the first quarter of 2022.
Here are some of the basic requirements and general characteristics of conventional loans.
Credit Score: Credit score minimums can vary from state-to-state and even product-to-product, but it’s possible to be approved for a conforming conventional loan with a score of as little as 620.
Down Payment Requirements: A 20% down payment requirement is one of the most common myths when it comes to buying a home. Some conventional mortgage loans offer as low as 3%. The caveat here is that many lenders typically require private mortgage insurance when putting down less than 20%.
Interest Rates: Conventional loans can exist in the form of fixed-rate or adjustable-rate loans. Interest rates vary; typically, the higher your credit score and better your credit history, the lower rate you’ll qualify for with a conventional loan.
First-Time Homebuyer Perks With Conventional Loans
One of the most common barriers to entry for individuals looking to buy their first home is finding the cash for a down payment. Luckily, various states, counties, and private lenders have first-time homebuying programs which allow borrowers to use a down payment of as low as 3% of the purchase price of the home.
Some first-time homebuyers may also qualify for down payment assistance, which typically comes in the form of a forgivable grant, a forgivable loan, deferred-payment loans, and low-interest loans.
Qualifying for a Conventional Loan as a Self-Employed Borrower
Another common mortgage myth is that self-employed borrowers cannot qualify for conventional loans. Not only is this false, but self-employed borrowers are held to the same exact qualifying standards as traditionally-employed borrowers for credit, down payments, and income.
Rather than submitting W-2s and pay stubs to prove income, self-employed homebuyers submit their personal tax returns. There are certain lenders that allow self-employed borrowers to qualify for their mortgage loan with just one year’s tax returns, but two years is most common.
Other Conventional Loan Options
Lenders have created some unique avenues to buy a home beyond those first-time homebuyer and self-employed options. Did you know that you’re able to buy a home for your parents with just 5% down? Or that there are programs out there that count personal assets as income?
I know what you’re thinking, “This has to be something sketchy straight from 2008.” The reality is, the two options listed above—Gift of Equity and select asset-based mortgages—are conventional loans! There are plenty of savvy ways to buy a home without needing to apply for a riskier loan type.
If you have any additional questions about conventional loans, first-time homebuyer programs, mortgage qualification for self-employed borrowers, or anything else involving your dream of homeownership, feel free to contact a member of my team or apply for a pre-approval!