How to Qualify for a Conventional Mortgage: Top Tips and Guidelines

Author: Ashley Hickmon

For many people, owning a home is a major life goal. One of the most common ways to achieve this goal is through a conventional mortgage. As a professional mortgage lender, I, Ashley Hickmon of Fairway Fast Mortgage, am here to guide you through this journey. In this comprehensive guide, you’ll learn how to prepare and qualify for a conventional mortgage.

Understanding Conventional Mortgages

Before we delve into how to qualify for a conventional mortgage, it’s important to understand what these mortgages are. A conventional mortgage is a home loan not insured by a federal agency such as the Federal Housing Administration (FHA), Veterans Affairs (VA), or the United States Department of Agriculture (USDA).

Conventional mortgages fall into two categories: conforming and non-conforming. Conforming loans follow the guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and guarantee mortgages. Non-conforming loans, on the other hand, don’t meet these guidelines. Jumbo loans, for instance, exceed the loan limits set by Fannie Mae and Freddie Mac.

Conventional mortgages can offer significant flexibility and potential cost savings. However, they require borrowers to meet certain qualifications.

Key Qualifications for a Conventional Mortgage

While the exact requirements can vary depending on the lender, below are some of the common qualifications you need to meet for a conventional mortgage:

Credit Score

Your credit score is a crucial factor that lenders consider when determining your eligibility for a conventional mortgage. Generally, a credit score of 620 or higher is required. However, borrowers with higher scores can often secure more favorable loan terms. You can check your credit score for free annually through AnnualCreditReport.com.

Debt-to-Income Ratio (DTI)

Your DTI ratio is another important factor. This ratio is the percentage of your monthly income that goes towards paying off your debts. Most lenders prefer a DTI of 43% or lower, but it’s possible to get approved with a higher ratio in some situations. Here’s a guide from the Consumer Financial Protection Bureau on how to calculate your DTI.

Down Payment

The down payment is a percentage of the home’s purchase price that you pay upfront. While you can obtain a conventional loan with as little as 3% down, putting 20% down allows you to avoid private mortgage insurance (PMI), which can lead to significant savings over the life of the loan. Here’s more information on how to save for a down payment.

Employment History

Most lenders require borrowers to have a stable employment history. Typically, you’ll need to have been with the same employer or in the same line of work for at least two years.

Adequate Assets

In addition to the down payment, lenders will also assess whether you have sufficient assets to cover closing costs and several months’ worth of mortgage payments.

Tips to Increase Your Chances of Qualifying

Improve Your Credit Score

Your credit score plays a major role in qualifying for a mortgage. Pay your bills on time, keep your credit utilization low, and avoid opening new lines of credit before applying for a mortgage. You can use tools like MyFico to monitor your credit score.

Lower Your DTI Ratio

Lowering your DTI ratio can improve your chances of approval. You can do this by paying down debt or increasing your income.

Save for a Down Payment

The bigger your down payment, the less risk you pose to the lender. Start saving early to make this more manageable.

Maintain Steady Employment

Avoid job hopping before applying for a mortgage. Lenders like to see stable employment.

Keep Your Financial Situation Stable

Try not to make significant financial changes before applying for a mortgage. This includes big purchases, large deposits or withdrawals, or opening new lines of credit.

Pros and Cons of Conventional Mortgages

Before diving into the process of applying for a conventional mortgage, it’s crucial to understand both the benefits and potential drawbacks. Here are a few key points to consider:

Pros

Lower Costs for Good Credit: If you have a high credit score, you might be eligible for lower interest rates, which can save you thousands of dollars over the life of your mortgage.
Flexibility: Conventional mortgages can be used for a wider variety of property types than government-backed loans.
No Upfront Mortgage Insurance: Unlike FHA loans, conventional mortgages don’t require an upfront mortgage insurance premium if you make a down payment of 20% or more.

Cons

Stricter Requirements: Conventional mortgages typically require a higher credit score and larger down payment than government-backed loans.
Private Mortgage Insurance: If you put down less than 20%, you’ll have to pay for private mortgage insurance (PMI), which adds to your monthly mortgage payment until you reach 20% equity.

Understanding Interest Rates

Interest rates play a critical role in determining your monthly mortgage payment. Conventional mortgages can come with either fixed or adjustable interest rates:

Fixed-Rate Mortgages: The interest rate remains the same throughout the entire loan term. This provides stability and predictable monthly payments.
Adjustable-Rate Mortgages (ARMs): The interest rate can change periodically based on market conditions. This means your monthly payment could go up or down over time.

Remember, securing a lower interest rate can lead to significant savings over the life of your loan. It’s worth taking the time to shop around and compare rates from different lenders before settling on a mortgage.

The Role of Private Mortgage Insurance (PMI)

If you can’t afford a 20% down payment on your home, you’ll typically have to pay for Private Mortgage Insurance (PMI). This insurance protects your lender in case you default on your loan. The cost of PMI varies but is usually between 0.5% and 1% of the entire loan amount annually. However, once you’ve built up 20% equity in your home, you can request to have the PMI removed.

Impact of Loan Term Length

The length of your loan term can greatly impact both your monthly payment and the total amount you pay in interest. Shorter loan terms typically have higher monthly payments but lower interest rates, meaning you’ll pay less over the life of the loan. Longer loan terms will have lower monthly payments but higher interest rates, resulting in more interest paid over time. When choosing your loan term, it’s important to consider your current financial situation and long-term financial goals.

What Happens If You Default on a Conventional Mortgage?

While nobody plans to default on their mortgage, it’s important to understand the potential consequences. If you fail to make your mortgage payments, the lender has the right to foreclose on your property. Foreclosure can have devastating effects, including a significant drop in your credit score and potential difficulty securing housing in the future. If you’re struggling to make your mortgage payments, it’s crucial to reach out to your lender as soon as possible. They may be able to work with you to modify your loan terms or find other solutions to avoid foreclosure.

Qualifying for a conventional mortgage may seem daunting, but with a bit of preparation and guidance, it’s an achievable goal. Remember, every borrower’s situation is unique, and what works for one person may not work for another. It’s always a good idea to speak with a mortgage professional who can offer personalized advice. I invite you to reach out to our team at Fairway Fast Mortgage or start your loan application today.