Conventional loans are often (erroneously) referred to as conforming mortgages or loans; while there is overlap, the two are distinct categories. A conforming mortgage is one whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. Chief among those is a dollar limit, set annually by the Federal Housing Finance Agency (FHFA): currently, in most of the continental U.S., a loan must not exceed $424,100. So, while all conforming loans are conventional, not all conventional loans qualify as conforming. For example, a jumbo mortgage of $800,000 is a conventional mortgage, but not a conforming mortgage – because it surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac.
Conventional loans' interest rates tend to be higher than those of government-backed mortgages, such as FHA loans (though these loans, which usually mandate borrowers to pay mortgage-insurance premiums, may work out to be just as costly in the long run).
Typically linked to the interest rate are points, fees paid to the lender (or broker). The more points you pay, the lower your interest rate. One point costs 1% of the loan amount and reduces your interest rate by about 0.25%. In general, people who plan on living in a home for a long time (10 or more years) should consider points to keep interest rates lower for the life of the loan.
The final factor in determining the interest rate is the individual borrower's financial profile: personal assets, credit worthiness, and the size of the down payment he or she can make on the residence to be financed.
In addition, conventional mortgages are often the best or only recourse for home buyers who want the residence for investment purposes or as a second home; or who want to purchase a property priced over $500,000.
WHO IS NOT SUITABLE FOR A CONVENTIONAL LOAN?
Generally speaking, those who are just starting out in life, those with than a little more debt than normal or those modest credit rating often have trouble qualifying for conventional loans. More specifically, these mortgages would be tough for those who:
In the years since the subprime mortgage meltdown in 2008, lenders have tightened the qualifications for loans –"no verification" and "no down-payment" mortgages have gone with the wind, for example – but overall, the most of basic requirements haven't changed. Potential borrowers need to complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documents to perform an extensive check on their background, credit history and current credit score.
No property is ever 100% financed. In checking your assets and liabilities, a lender is looking to see not only if you can afford your monthly mortgage payments (which usually shouldn't exceed 28% your gross income), but also if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage.
1. Proof of Income
These documents will include, but may not be limited to:
Thirty days of pay stubs that show income as well as year-to-date income
Two years of federal tax returns
Sixty days or a quarterly statement of all asset accounts including your checking, savings and any investment accounts
Two years of W-2 statements
Borrowers also need to be prepared with proof of any additional income such as alimony or bonuses.
You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need gift letters which certify that these are not loans and have no required or obligatory repayment. These letters will often need to be notarized.
3. Employment Verification
Lenders today want to make sure they are loaning only to borrowers with a stable work history. Your lender will not only want to see your pay stubs, but may also call your employer to verify that you are still employed and to check your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
4. Other Documentation
Your lender will need to copy your driver's license or state ID card and will need your Social Security number and your signature allowing the lender to pull your credit report.