There is a false perception that conventional home loans are only available for borrowers wishing to contribute a large down payment of at least 20% of the home value. Although FHA financing is a popular loan program for new home buyers with low down payments, there are also some conventional loan choices with similar terms that provide cost savings opportunities by reducing expenses; as is the case when you select this program over a FHA program that requires an upfront mortgage insurance premium along with the requirement of having mortgage insurance for the life of loan.
Currently, Fannie Mae provides a conventional loan program with as little as 3% down payment (5% for approved condominiums) for those who qualify. This loan program is half of a percent lower than FHA’s minimum requirement. This is ideal for borrowers who want to put as little down as possible.
When qualifying for any kind of financing, mortgage lenders must analyze monthly income and all known debts and 97% conventional financing is no exception. Normally, total debt-to-income percentage (including the predicted payment for the new home loan) must not surpass the debt-to-income rate mandated by federal guidelines. For conventional financing, that percentage is lower than FHA loans. This can make it tougher for some home buyers to be eligible or could lead to a lesser pre-approval dollar amount for the borrower. Currently, the maximum overall debt to income ratio that is allowable on conventional mortgages is 50%. This percentage includes all payments which appear on the borrower’s credit report plus the proposed mortgage payment, including taxes, insurance and HOA fees (if applicable).
For buyers with acceptable debt-to-income percentages and who meet other applicable criteria, conventional home loans provide an easier approval process overall. Mortgage insurance costs may also be less and can result in measurable savings over the life of the loan.
All mortgage programs include varying benefits and drawbacks as well as closing expenses and monthly payments. The important thing is to be aware of all of your options in order to make an informed decision on which is best for you and your particular situation. An experienced loan originator will be able to analyze your individual situation and compare it to your needs before offering mortgage options.