When it comes to purchasing a home or refinancing a home loan, the most common financing used is the conventional loan. These home loans are backed by either Fannie Mae or Freddie Mac and offer attractive terms for most homeowners, if they meet the guidelines of the program. This article will provide a guide to some of the most common questions that consumers have about obtaining these loans, including down payment requirements, credit score requirements, home loan limits and other facts.
Conventional loans have a minimum credit score requirement of a 620 or higher. However, the interest rate you receive will vary, on a sliding scale, depending on where your credit score falls, between a 620 and 760 score. This means that someone with a 760 credit score or higher, will receive the most favorable terms on a conventional loan and your interest rate may vary every 20 points you move down from there (740, 720, 700, etc.), until you reach 620.
If you are purchasing a home to live in as your primary home, the Conventional loan requires a 3% minimum down payment, if you are a first-time home buyer, or if you qualify for the Fannie Mae Home Ready program (see our article on this program for guidelines). Otherwise the minimum down payment is 5% for the purchase of a primary home. For a secondary or vacation home, the minimum down payment increases to 10%. And for an investment property, the down payment minimum increases to 15%.
In addition, if you are using the program to refinance your existing home loan, you can take out a rate-term refinance (with no cash out), up to 95% of the value of a primary home or 80% of the value of a home, if you are completing a cash out refinance.
Home Loan Limits:
The current conventional loan limit is $453,100 in Maricopa, Pinal and Pima Counties in Arizona. Meaning that this is the maximum loan size you can obtain using a Conventional loan for either a purchase loan or refinance of your home loan. That means, with a 5% down payment on a Conventional loan, you could qualify for a home purchase up to $476,900. And with a 20% down payment on a Conventional loan, you could qualify for a home purchase up to $566,300.
On a conventional loan, if you make less than a 20% down payment on a purchase or if you are refinancing and have less than 20% equity, mortgage insurance will generally be required. However, there are options to not make a monthly mortgage insurance payment, if you do not have 20% equity, by using lender paid mortgage insurance or buying out mortgage insurance.
In addition, the cost of mortgage insurance will vary based on your down payment and credit score. The higher your credit score (from a 620 up to a 760 again), the lower your mortgage insurance cost will be. And the higher your down payment, the lower your mortgage insurance cost will be. Or in other words, a 5% down payment will have less expensive mortgage insurance than a 10% down payment and a 10% down payment will have less expensive mortgage insurance than a 15% down payment.
Foreclosure, Short Sale or Bankruptcy:
To obtain a conventional loan, you must wait four years after the completion of a short sale and seven years after the completion of a foreclosure to obtain a new conventional loan. In addition, there is also a four-year waiting period after the discharge of a chapter 7 or 11 bankruptcy to obtain a new home loan.
Debt To Income Ratio:
To qualify for a conventional loan, in general your debt to income ratio should not exceed 50%, including all monthly payments on your credit report. This means that if you make $60,000 a year or $5,000 a month, all of your monthly debt payments, including a potential mortgage, cannot exceed $2,500.
These are some of the basics you need to know about the conventional home loan program, but of course everyone’s individual situation is unique and it is always best to speak with a licensed lender, such as Strategic Mortgage and explore all available options, for your specific situation.
For more information on home purchase loan or refinance programs for existing and potential home owners, please contact Bill Kamboukos of Strategic Mortgage at (480) 219-3682 or by emailing: email@example.com or online at www.strategicmtgaz.com
Strategic Mortgage, LLC - AZ BK#0909514 - NMLS#158804 - Equal Housing Lender – Vasilios Bill Kamboukos Jr – NMLS#160440