Homebuyers often like Conventional loans because of their flexible down payment options, which can be as low as 3%, easier inspection requirements, and the opportunity to get rid of mortgage insurance.
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.
Sellers are wary of FHA loans because they believe their property will have to pass a level of scrutiny that conventional loans don't. FHA indeed has minimum property requirements (MPRs) that don't apply to other loans.
Seller concession limits for conventional loans typically range from 3% to 6% of the home's purchase price. However, the limit varies based on factors such as the buyer's down payment and the loan-to-value ratio.
Sellers often prefer conventional mortgages because they usually offer lower interest rates and the qualification requirements can be more lenient than those of an FHA loan. Additionally, with conventional loans, sellers may not have to pay private mortgage insurance or other upfront costs associated with an FHA loan.
There are no specific income limits for most traditional mortgage loans, such as conventional loans or FHA loans. Lenders typically focus on your income to qualify for a mortgage by looking at factors like your debt-to-income (DTI) ratio, credit score, and overall financial stability.
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
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.
Why? They feel that buyers who can secure any other financing option are 'stronger buyers. ' FHA buyers have a reputation for having low credit scores, little money to put down, and less than optimal qualifying requirements. Sellers want a 'sure thing' when they sell their home.
Benefits of a Conventional Loan
Conventional mortgages are often the best choice for borrowers who have excellent credit and a down payment of at least 20 percent. These loans can be used to buy a primary home, second home or investment property, unlike FHA or VA loans, which may only be used for a primary home.
Reasons your mortgage application may be denied include a dip in your credit score, increased debt, paperwork errors, a low home appraisal and unverified cash deposits.
Conventional loan closing costs encompass various fees associated with the necessary services required to secure a mortgage. Whether you are purchasing a home or refinancing, you will be responsible for covering these closing fees. Generally speaking, the expenses range between 3% and 6% of the loan amount.
Someone might want a conventional loan if they have a strong credit score and low debt-to-income ratio, because then they can get a relatively good rate. It's common to be able to put down 3% with a conventional loan these days, whereas even FHA loans require 3.5%.
The type of mortgage being granted also plays a role. According to the ICE Mortgage data, conventional loans move slightly faster (43 days) than FHA loans (45 days), for example. Tack on the 20 days on market before that point, and the home sale would take around two months to complete, from listing to closing.
Conventional loan
If the buyers provide between 10% and 25% for a down payment, sellers may pay up to 6% in seller concessions. If the buyers provide more than 25% for a down payment, sellers may pay up to 9% in seller concessions.
The term “conventional” is used to distinguish these “regular” home loans from programs such as FHA and VA, which do receive government backing. In California, home appraisals are usually required for conventional mortgage loans, especially in purchase scenarios.
Lower Chance of Requested Repairs
Some sellers do not wish to be burdened with additional home improvements during the stress of a potential move and home sale, so the inflexibility of a non-conventional loan becomes problematic.
Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.
Which loan is better: FHA or conventional? To a large extent, that depends on you and your financial profile. Generally, a conventional loan is best for those with strong credit and a bigger home buying budget. If your credit score is below 620, a loan backed by the FHA might be your only option.
To comfortably afford a $200,000 house, you'll likely need an annual income between $50,000 to $65,000, depending on your specific financial situation and the terms of your mortgage. Remember, just because you can qualify for a loan doesn't mean you should stretch your budget to the maximum.
A lot of first-time homebuyers think they need a 20% down payment to qualify for a conventional loan. That's simply not true. Conventional loan down payment requirements are as low as 3%. That's only $9,000 down for a $300,000 home, or $6,000 down for a $200,000 home.
To afford a $650,000 house, you typically need an annual income between $160,000 to $215,000, depending on your financial situation, down payment, credit score, and current market conditions. However, this is a general range, and your specific circumstances will determine the exact income required.