A mortgage is a loan that helps a Kansas City home buyer purchase a house. Mortgages come in different types, including federally backed mortgages like FHA loans, VA loans and USDA loans. Mortgages also come in "conventional" types, meaning that the lender is not protected by the federal government if the home buyer defaults on payments. This assumes the loan continues to be held by the lender and not sold to another entity and/or Fannie Mae or Freddie Mac. When compared to federally backed loans, conventional loans have some advantages and disadvantages. Here's what home buyers need to know.
Conventional Loan Requirements May Vary
Mortgage lenders take a risk when they make a conventional loan, so they often have stricter requirements than federally backed loans. These requirements may vary by lender; there is no consistency from one lender to the next.
Some lenders require that buyers put down at least 20% to qualify for a conventional loan. Buyers who can't put down 20% to get a conventional loan may still be able to qualify for a loan through certain lenders, but they may have to pay for private mortgage insurance (PMI). PMI is an insurance that the buyer pays for to protect the lender in the event of a default. Often, even with PMI, lenders will require a minimum of 5% down for a house and 10% down for a condo.
Lenders also like to see buyers have good credit, with a relatively low debt-to-income ratio. The actual credit score and debt-to-income ratio may vary. Typically, the highest debt to income ratio that a lender will accept is about 43%. It's often difficult to obtain a conventional loan with poor credit than it is to get a federally backed loan. Anyone who has poor credit and who wants to get a mortgage may need to speak to lenders about options other than a conventional loan.
Steps to Obtain a Conventional Loan
Step 1: Contact Lenders
To obtain a conventional loan, a home buyer begins by contacting mortgage and home lenders. Shopping around is important, especially when trying to get a conventional loan. Lender requirements vary so much that buyers can save a lot of money and get a much more affordable mortgage by casting a wide net when looking for a lender.
When contacting lenders, the buyer should ask questions in order to compare the lenders with one another. While many buyers ask questions about potential interest rates and how much money will be required to be put down, it's also important to ask questions about the borrowing process. The way that the lender answers these questions is important. Communication is crucial during the process of getting a loan. If the buyer finds communication with the lender to be difficult, another lender may be more appropriate for that buyer.
Step 2: Get Pre-Qualified First, Then Get Pre-Approved
Once a buyer has picked a lender, they must be pre-qualified and then pre-approved. A mortgage prequalification is usually a simple process consisting of questions about employment, down payments and credit history. Whereas the pre-approval process requires the buyer to turn in a great deal of paperwork to the lender and a credit score check and review. Usually this paperwork pertains to the buyer's employment, income, assets, savings and other financial records. The lender will walk the buyer through this process, and will outline very specifically what they need in order to get the buyer pre-approved.
The pre-approval process is a part of the loan application process. Once the pre-approval process is complete, the buyer will have a good idea about whether or not they can expect to be approved for a loan when the time comes. As long as their financial situation remains unchanged from the time they pre-approved until the close of escrow, the loan is likely to fund.
Step 3: Make An Offer on a Home
Prior to making an offer on a home, the lender will produce a letter stating that the buyer is pre-approved and has the ability to buy the home. This pre-approval letter is reassuring to buyers, who want to know that the offer comes from a serious home buyer.
Step 4: Get An Appraisal and Homeowners Insurance
Once a home buyer has made an offer on a home and the offer has been accepted, the lender will usually require an appraisal of the home. Depending on the state where the home is located and lender policies, either the buyer or the lender will order the appraisal. The home buyer will also need to obtain homeowners insurance before closing.
Step 5: Update Paperwork and Final Credit Check
Toward the end of the escrow period, the home buyer may be required to re-submit financial documents to show an update of their financial situation. The lender uses this updated paperwork to determine whether the buyer will get the loan. At the very least, the lender will check the borrowers credit one last time to make sure there have been no significant changes since last checked.
Step 5: Closing
After the paperwork, final credit check and closing costs have been paid, the loan is funded and the transaction closes. The buyer will then obtain the keys to their new home.
Contact a Lender to Get Started
If you're a home buyer who would like to get a conventional loan, or if you would like to know more about the difference between conventional loans and federally backed loans, contact a reputable mortageg and home ender in your area.