Conventional Loans are loans that aren’t backed by a government agency but instead are originated and provided by financial institutions like a private mortgage lender or bank. These loans don’t have the same perks as government guaranteed loans, but they are a great opportunity to become a homeowner, especially if you have a solid credit score and some money in savings.
Borrowers who use Conventional Loans are required to pay a minimum down payment of 3%. Any down payment of between 3% and 20% will incur PMI (private mortgage insurance), but If the buyer is able to put down 20% at closing, this will be waived. There is no PMI required up front, instead it is added to monthly fees until 20% of the loan is paid. Additionally, you need to have a minimum credit score of 620 to qualify for this loan. These loans are great options for borrowers with good credit and healthy savings.
Conventional Loans vs. VA Loans
$0 down payment
3% minimum down payment (PMI incurred on loans unless buyer puts 20% down)
No minimum credit score required by the VA and relaxed requirements by lenders
620 minimum credit score
VA funding fee (typically between 1.25% and 3.6%)
No PMI required up front, instead it is added to monthly fees until 20% of loan is paid
Reserved exclusively for veterans, service members, and military families
Great option for borrowers with good credit and a healthy savings
The process of getting started with a Conventional Loan is quite similar to that of other traditional loans. You will need to prepare all necessary documents like pay stubs, tax returns, and proof of employment for a lender in order to get a pre-approval. That pre-approval will help you determine your buying power and then you can get started on the fun part, finding your home!
If you have served in the US military or are currently serving and are interested in having a government insured loan that has a $0 down payment and no PMI, you’ll want to look into the VA Loan.
Once you’ve spoken with your lender about your options within the Conventional Loan, it’s time to jump into the home buying process.
Go home shopping: this is the fun part! Check out homes that work within your budget and have the amenities you’re looking for.
Submit an offer: once you find the house you’re ready to commit to, it’s time to make an offer and prepare for negotiations!
Submit updated documents to your lender: this will happen right before you submit an offer that has been accepted. Your lender will supply you with a list of documents to submit and that will get your loan into processing!
Lock in your interest: once your lender has received your updated documents and the contract, you’ll be given an opportunity to lock in your interest rate. Typically you can lock it in for 15, 30, 45, or 60 days. Be sure to lock your rate for as long as the negotiated escrow period, or longer! Inspections can take a while so don’t be afraid to go with something outside of 30 days.
Get a home appraisal and home inspection: now that your offer has been accepted, you’ll move forward with the loan process and will begin the inspection and appraisal process.
Receive approval: after all your documents have been reviewed you’ll receive underwriting approval and can go to closing.
Close on your home: after you’ve had an offer accepted, gone through the full approval process and all inspections and are ready to go, your lender will clear you for closing!
Sign your final loan documents and get the keys to your home: Congratulations, you are a homeowner!
Documents that will be reviewed
As mentioned above, your lender will need to obtain very specific documents and verifications to submit to the underwriters in order to complete the loan process and get approval. These documents include:
Credit report to ensure the borrower has a good credit score and no red flags on past credit like bankruptcy or other financial issues.
Employment verification to show how much income borrowers have now, and any anticipated additional income as laid out in employment agreements. Documents to help with this include:
W-2’s from the last two years.
Pay stubs from the last 30-60 days prior to applying.
Tax Returns from the last two years
Asset information including statements from all bank accounts such as checking, savings, and retirement accounts.
Any additional income asset or liability information like dividends, overtime, pension, child support, etc.
Renovation plans and permits (as applicable) your lender will review these documents with the underwriting team to ensure that the repairs to the home match the increase value to the home
If all of these documents are checked and approved, underwriters can issue a “clear to close'' which means borrowers are ready to go to the final stage of the process, closing.
The costs associated with FHA Loans are comparable to VA Loans with closing costs ranging from 2% to 4%. When you add in the down payment requirement, a home buyer can expect to have a minimum of 5.5% to 7.5% in overall costs.
An investment in real estate always beats renting. Even if you aren’t a veteran or have already used your VA Loan, you should always try to own the house you are living in and the Conventional Loan could be a great option.