THE ABCs OF BORROWING MONEY TO BUY A HOME
For most Americans, buying a home requires qualifying for a loan from a bank or other qualified lender. Conventional loans are by far the most common of all mortgage loans and represent over 60% of all mortgage loans originated in the United States. The other 40% are primarily FHA, VA or USDA loan types, which are similar to conventional loans, but have other requirements and benefits allowing American’s that meet the requirements to buy more home for less money. Because the majority of mortgage loans are conventional, the focus of this article is going to be on conventional loans and not FHA, VA or USDA loan types.
Conventional loans are also known as “conforming” loans because they conform to a set of standards established by Fannie Mae and Freddie Mac, which are government, backed loans also known in the lending world as the Secondary Market. By originating conventional loans that conform to Fannie Mae and Freddie Mac standards, after closing a loan, the lender can then group conforming loans together into a “pool” of loans and then sell them into the Secondary Market as a way of generating additional capital for the bank or lender. Most lenders sell loans into the Secondary Market but continue to service the loan, so these post-closing transactions are seamless and mean very little to you because none of the loan terms change.
Conventional conforming mortgage loans are used to purchase a primary residence, seasonal or secondary home, and rental property. They are fixed rate or adjustable (ARMs) and have terms ranging from 10 to 30 years. Conventional loans are a great option for today’s homebuyer. They offer great rates and low fees and down payments as low as 3%.
Here are some characteristics of a conventional mortgage loan:
- The loan amount is limited based on the average cost of living for the area in which you are buying. The standard conventional loan amount for South Carolina in 2017 for a single-family home is capped at $424,100.00. Increased loan amounts are available for 2, 3, and 4 unit homes.
- Conventional loans generally require a credit score of 680 or above, lower scores can qualify but include other conditions and costs.
- Down payments can be as low as 3% with Private Mortgage Insurance (PMI), which helps insure the loan in the event of default on the loan terms. The required PMI increases the monthly mortgage payment, as it is included in your monthly loan payment, but can be dropped once you have accumulated at least 20% equity in the home.
- Proof of income and debt including:
- 60 days of bank statements (all pages)
- 30 days of pay stubs
- 2 years of tax returns for the most recent taxes filed
- 2 years of W2s
- 2 years of 1099s including any social security, retirement and or pension awarded
- A Debt to Income ratio (DTI) of less than 43%. The DTI is how much money you make as compared to how much money is required to pay all of your debt and expenses.
- No PMI is required when originating a loan with at least 20% down or a Loan to Value of 80%, meaning the equity in your home is at least 20%.
Now that we covered the basics requirements of a conventional mortgage loan hopefully, you have a better understanding of exactly what it takes to purchase a home. The good news is working with Rick and Jim will allow you to find the perfect home, sell any existing home and makes the entire process as convenient as possible. We, along with the companies we collaborate with offer you a one-stop shop to assist with the entire process by providing you with a mortgage broker that can get you pre-qualified and find you the absolute best loan deal available. We also work directly with companies that offer home insurance, home warranties, and title insurance options that help alleviate the stress of buying and selling a home. What are you waiting for? Log onto www.RickandJimProperties.com or message us on Facebook and let us get started working for your today!