Homes with major condition issues, such as those that impact property's safety, structural integrity, or livability, often don't qualify for conventional financing.
In most cases, conventional loans require a credit score of 580 or higher. Lenders also look for excessive debt or certain negative events on your credit report, such as a bankruptcy or missed payments—which may make it harder for you to qualify for a conventional loan.
With Conventional loans, you can buy primary homes, vacation homes, rental homes, and investment properties and you can have as many Conventional loans as your lender will approve. You can often borrow less money to buy a home with an FHA loan compared to a Conventional loan.
Yes, there are some potential disadvantages for sellers to consider when choosing a conventional mortgage. First, the seller will have to meet more stringent requirements to qualify for a conventional loan than with an FHA loan, including higher credit scores and larger down payments.
While you may have the capacity to make your monthly mortgage payments, most lenders won't approve your loan if you don't meet the baseline requirements for a conventional mortgage, including a credit score, verifiable income, and an appealing debt-to-income (DTI) ratio.
Let's discuss what underwriters look for in the loan approval process. In considering your application, they look at a variety of factors, including your credit history, income and any outstanding debts. This important step in the process focuses on the three C's of underwriting — credit, capacity and collateral.
Conventional Loan Minimum Credit Score
In most cases, you'll need a credit score of at least 620 to qualify for a conventional loan. When you apply, your lender will check your credit history to determine if you have qualifying credit. If you don't, you might not get approved for the loan.
The property needs to be free of known hazards that affect health and safety, the home's use, or may affect the structural soundness of the house and its marketability. These include, but are not limited to: Toxic chemicals. Radioactive materials.
Home Inspections: While conventional loans don't require home inspections, some lenders might suggest or require one if the appraisal highlights potential concerns about the property's condition.
Conventional loans require the property to be safe for occupancy. If the appraiser identifies any safety hazards, the home may fail the appraisal. Common safety issues include: Electrical Problems: Outdated or faulty wiring, exposed wires, or an overloaded electrical panel can be significant concerns.
Conventional conforming loans: 7.6% denial rate. Refinance loans: 24.7% denial rate.
The requirements for a conventional loan include: Credit score: 620. Debt-to-income (DTI) ratio: 45 percent (with exceptions up to 50 percent) Down payment: 3 percent for a fixed-rate loan; 5 percent for an adjustable-rate loan.
If your home is determined to be in a high-risk location, it can be lead to it being uninsurable. One of the main factors that contribute to whether a home is uninsurable are the effects of weather risks. If your home is in an area that experiences frequent natural disasters, it can make your home uninsurable.
Homes that may not pass an FHA inspection
Health and safety concerns: Properties with potential health and safety hazards, such as lead-based paint, asbestos, or mold, may not qualify for an FHA loan.
In California, home appraisals are usually required for conventional mortgage loans, especially in purchase scenarios. The appraiser's report gives the mortgage lender better insight into the actual market value of the home.
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
FHA Loans Can't Be Approved for These Properties
You can't use an FHA loan to buy a frat or sorority house, a condo hotel, or any property used as a “transient occupancy” operation where tenants stay fewer than 30 days.
Underwriters verify your income, assets, and debts and review information about the property to determine if you qualify for a home loan. You can speed up the underwriting process by providing all the necessary documentation during the application phase and communicating with your lender.
Homes with structural issues / roof issues / non habitable or non insurable will not qualify for a mortgage. Or if there's some contractor lien that isn't resolved.
The minimum down payment requirement for a conventional loan is 3% of the loan amount. However, lenders may require borrowers with high DTI ratios or low credit scores to make a larger down payment. Even if it's not required, if you're able to make a higher down payment, you may want to consider doing so.
Drawbacks include stricter requirements to qualify, large payments if market rates increase, lack of 5% equity requirement, and additional fees if borrower has a less than excellent credit score.
Most lenders will require 1-2 years of both personal and business (if applicable) tax returns when assessing your income level. This is because a mortgage loan is a long-term commitment, so they want to be certain that whatever monthly payment amount is agreed upon fits nicely into an affordable budget over time.
Spending habits
And they will look to see if you are regularly spending less than you earn consistent with the savings you are claiming. No matter how frugal you might be most lenders have adopted a floor on the living expenses they will accept.
Conventional loans can be helpful in several different situations including, first-time homebuyers, buyers who want to refinance, those who want to buy a second property (which is not allowed with government-backed loans), buyers with higher credit scores, or those who can put more money down.