Conventional home loans are usually harder to qualify for because of their not insured by any federal authority, such as FHA home loansUSDA home loans or VA home loans.  Currently, these types of loans require credit scores of at least 620 to 640, but in order to get the best rates and low costs you must have a score of 740+.   Also, you can only borrow 80% of the homes current value, unless you are prepared to pay for Private Mortgage Insurance (PMI).

Here are a couple of customer scenarios:

Customer #1

  • New Home Purchase Price of $160,000
  • Loan amount requested of $120,000
  • Only borrowing 75% of current value of house
  • Has 25% of his own money to put down on house
  • Great credit score of 740+
  • Salaried job time of 2+ years
  • Gross Income is $3500/month
  • Current Debts are only $400/month
  • House is a “normal”, 3 bedroom, 2 bath, 2 car garage house, in nice neighborhood

*This customer will be getting the best rates/terms because his loan conforms very nicely to all the requirements of most lenders and Fannie Mae/Freddie Mac guidelines as well which will make this loan a very easily sold loan on the market so the bank has very little risk.  This customer will be a happy camper and his loan process will go very smoothly!

Customer #2

  • New Home Purchase Price of $160,000
  • Loan amount requested of $144,000
  • Needs to Borrow 90% of current value of house
  • Has only 10% of his own money to put down on house
  • OK credit score of 680
  • Salaried job time of 2 years
  • Gross Income is $3500/month
  • Current Debts are only $800/month

House is a lovely, but unique home with metal siding and roof, a kitchen in the basement, the home is heated by an outdoor wood furnace, on 25 acres in the country.

*This customer will wonder why the loan process is so difficult!  He pays his debts, although he has quite a few.  He has a down payment, although with less than 20% down he will be required to have PMI on his loan, which will make his payment about $130/month higher than he originally figured it would be.  An unusual home in the country with very few, if any houses like it, will make it nearly impossible to get a strong, accurate appraisal that will be accepted by any underwriter.  Plus, it carries the added risk that if the lender ever has to foreclose on it, it will only sell to a person looking for just such a unique home!  This customer and his home are not typical, which makes this loan a much higher risk to lenders.

I hope this better illustrates how the conventional loan process differs tremendously from one borrower to another based on what they are bringing to the table.  The more guidelines a borrower can meet, the easier it will be to qualify them, and the less problems they may encounter along the way to help them get a great home loan!