When it comes to purchasing a home, there are many different types of mortgages in Texas available to choose from. One of the most popular options is the conventional home loan. This type of loan program is not guaranteed or insured by the government, which means that the lender takes on more risk. However, there are many benefits to a conventional home loan, and in this article, we will explore what a conventional home loan is, the benefits of this type of loan, and the requirements for obtaining a conventional loan.
What is a Conventional Home Loan?
A conventional home loan is a mortgage that is not guaranteed or insured by the government. Instead, the loan is issued by a private lender, such as a bank or mortgage company, and the lender assumes the risk of the loan. Because of this, the requirements for obtaining a conventional home loan are typically stricter than other types of mortgages.
Benefits of a Conventional Home Loan
When making a choice for a loan programme in Texas, it is good to know the benefits of the loan program now. That is why The Koehn Mortgage Group lists all the benefits of this loan program for you.
1. Lower Interest Rates
One of the main benefits of a conventional home loan is that they typically come with lower interest rates than other types of mortgages. This is because the lender takes on more risk with a conventional loan, so they want to attract borrowers with good credit who are less likely to default on the loan. As a result, borrowers with good credit scores can often secure a lower interest rate with it than they would with other types of mortgages.
2. No Private Mortgage Insurance (PMI)
Another advantage of a conventional home loan is that borrowers can avoid paying private mortgage insurance (PMI) if they make a down payment of at least 20% of the home’s purchase price. PMI is an insurance policy that protects the lender in case the borrower defaults on the loan. With a conventional loan, borrowers have the option to avoid this extra cost by making a larger down payment, which can save them thousands of dollars over the life of the loan.
3. Flexibility
Conventional loans also offer more flexibility than government-backed loans. For example, there are no restrictions on the types of properties that can be financed with a conventional loan. This means that borrowers can use it to finance a second home or an investment property, while this may not be an option with other types of mortgages. Additionally, this type of loan is available in a variety of terms, including 15-year and 30-year fixed-rate loans, as well as adjustable-rate mortgages (ARMs).
Conventional Home Loan Requirements
1. Credit Score
To qualify for a conventional home loan, borrowers typically need to have a credit score of at least 620. However, a higher credit score is preferred and can help borrowers secure a lower interest rate. In general, borrowers with a credit score of 740 or higher can typically secure the best interest rates and terms with a conventional loan.
2. Debt-to-Income Ratio
Another requirement for obtaining a conventional home loan is a low debt-to-income ratio (DTI). This is the ratio of the borrower’s monthly debt payments to their monthly income. Generally, lenders prefer a DTI of 36% or less, although this can vary based on the lender and the borrower’s credit score.
3. Down Payment
Conventional loans typically require a down payment of at least 3% of the home’s purchase price. However, if borrowers make a down payment of less than 20%, they will be required to pay for PMI. To avoid this extra cost, borrowers may choose to make a larger down payment of 20% or more.
4. Employment History and Income
Borrowers must also have a stable employment history and income to qualify for a conventional home loan. Lenders will typically require borrowers to provide documentation of their income, including pay stubs, W-2s, and tax returns. Additionally, borrowers may need to show that they have a stable employment history by providing documentation of their employment history for the past two years.
5. Property Appraisal
Finally, borrowers who are seeking a conventional home loan must also have the property appraised by a professional appraiser to determine its value. This is done to ensure that the loan amount does not exceed the value of the property, which can help protect both the lender and the borrower.
Why choose a Conventional Home Loan program?
A conventional home loan is a popular option for borrowers who are looking to purchase a home. While the requirements for obtaining a conventional loan are typically stricter than other types of mortgages, there are many benefits to this type of loan, including lower interest rates, no PMI with a larger down payment, and more flexibility. To qualify for a home loan, borrowers must typically have a credit score of at least 620, a low debt-to-income ratio, a down payment of at least 3%, a stable employment history and income, and a property appraisal. Overall, if you meet the requirements for the loan, it can be an excellent choice for financing your dream home in Texas.