Available Real Estate Loan Options

Conforming or Conventional?

These terms are often considered the same, but they are different. A conforming loan is one that meets the lending criteria of either Fannie Mae or Freddie Mac. Therefore, a conforming loan is a conventional loan, but not vice versa. One significant limit for a conforming loan is the maximum allowed loan value. For 2020, that number is $510,400 and is set by the Federal Housing Finance Agency. So all loans secured by Fannie Mae or Freddie Mac must fall below that amount to qualify.

How a Conventional Mortgage Application Works

Lenders are going to look at whether you can afford the mortgage you request. Normally they will limit the approved mortgage to an amount you can pay each month with less than 28% of your gross pay. So the documentation normally required includes:

- Proof of Income

- Pay stubs showing current pay plus total year-to-date

- Two or three years of tax returns

- Recent statements of all bank accounts showing balances

- Two years of W-2 or 1099 forms showing income



- Bank statements or other assets showing you have adequate funds for a down payment, closing costs, and a cash reserve. Banks will not allow you to borrow your down payment from anyone, so if someone gives you money as a gift it may need to have a notarized letter attached showing there is no intent for the gift to be a loan or needing to be repaid.

- Verification of employment is needed from your current employer. If you have recently changed jobs you may need to obtain verification from the previous employer as well. If you are self-employed additional information may be required about your work and income sources.

- Other documents can include your state driver’s license, your Social Security number, and forms to pull your credit history. The lender may have other documents to be signed to meet their underwriting criteria.

Understanding Interest Rates

Conventional mortgages from banks or lenders often have slightly higher interest rates than those offered by the government entities. However, Fannie Mae and Freddie Mac normally require the payment of mortgage insurance which effectively raises their interest rate. It’s important to compare them when deciding what type of conventional mortgage you want. Lenders may also require the payment of “points” as part of their mortgage agreement. A point equals 1% of the mortgage value, and each point lowers the interest rate by 0.25%. Keep in mind that points must be paid at closing so you will need to have additional cash available to pay them.

Mortgage interest rates are affected by the life of the mortgage. Taking a shorter mortgage term can reduce the effective interest rate but it results in a higher monthly payment. Interest rates are also affected by the prime rate set by the Federal Reserve and will rise and fall as the Reserve sets rates to control economic growth or decline. Paying a higher down payment can also reduce the interest rate since you are showing your ability to pay into the home’s equity and reduce the risk to the lender.

The final factor in setting the interest rate on your mortgage is your personal financial history. A borrower with exceptional credit can often obtain a lower interest rate or a higher mortgage amount because they are considered a lower risk for repayment of the loan. If you have credit issues it is important to work on improving them before you make an application for a mortgage to reduce the chances of being rejected.

Other Factors For Conventional Mortgages

There is a wide range of factors that factor into whether you can obtain a conventional mortgage and how much you will pay. But in summary, key factors include:

- Your credit rating Lenders normally want to see credit ratings around 700 or higher and reserve the best interest rates for borrowers with credit ratings exceeding 800.

- Debt-to-income ratio This is a calculation where the lender looks at your total credit card debt, car payments, and other debt and determines if it falls below 36% of your monthly income with some exceptions. If you do this calculation yourself, take into account all debt payments. If the ratio is high consider paying off some credit cards before applying for your mortgage.

- Amount of the down payment Lenders prefer that borrowers put down at least 20% (conforming mortgages can be different). If the borrower doesn’t have that much cash the lender may require mortgage insurance to protect their loan until the equity reaches a pre-set level such as 20-25%.

- No issues that will disqualify you for the conventional mortgage. These can include a previous foreclosure in the past seven years, other credit issues such as a history of late payments, and other factors noted above. Always ask the bank to describe in writing the reasons for their refusal, as this can help you solve the problems before applying again.

If you don’t qualify for a conventional mortgage for any reason, ask the lender if you qualify for an FHA loan. The Federal Housing Administration has more flexible underwriting considerations that allow for lower credit ratings and down payments.

When you are ready for your first or next home, please consider Mapp Realty in Sarasota FL. We can help you find your perfect home so you can experience all the beauty Southwest Florida has to offer. Contact us today at 941-379-2448.