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What Is a Conventional Loan?

When beginning the home-buying process, the first step is to get pre-qualified.  When you reach out to lenders, the terms conventional mortgage or conventional loan will be most likely the first thing offered to you.  That is because the conventional mortgage is the most common mortgage product within the marketplace.

Conventional Versus Government Loans

As lenders, it is our responsibility to provide you with the best mortgage program that fits your credit profile and your needs as a consumer.  Conventional mortgage loans are usually recommended to clients with a strong credit history, and who have the ability to put down a good amount of money.  The reason Conventional loans are geared toward those types of clients is that, unlike FHA, VA, and USDA loans, Conventional Loans are not backed by the Federal Government.

For a client to be recommended for a conventional loan, the mortgage will likely meet the requirements of Fannie Mae or Freddie Mac in regards to the amount of money down and provable income of the borrower.  It will also conform to the loan limits set forth by the FHFA or the Federal Housing Finance Administration.

Fannie Mae Conventional Loan Guidelines

As we mentioned before, Conventional Mortgages are for consumers with a solid credit history.  That is the first requirement of a conventional mortgage.  When being offered a conventional mortgage, the lender will review your credit history and confirm that your credit score is above a 620 FICO.  The down payment required for a conventional mortgage is based on the consumer’s credit score as well.

Applicants with a score over 740 will be able to put less money down.  The minimum down payment requirement for a conventional loan is 3%.  However, it is important to know, when using a conventional mortgage the applicant will be required to pay PMI insurance until the loan balance is below 80% of the appraised value.  Debt To Income ratios or DTI is another factor when determining if you qualify for a conventional mortgage.

What Is The Conventional Loan Guidelines on Debt-To-Income Ratio

What is the debt-to-income ratio?  This is a percentage used to determine your ability to repay the mortgage based on the monthly payment.  The debt-to-income ratio is found by taking all of your monthly debts and dividing that number by the applicant’s gross monthly income.  Ideally, lenders will look for a maximum ratio of 36% to qualify their clients for a conventional mortgage.

2023 Conventional Loan Guidelines on Loan Limits

Another requirement that we briefly touched on was the conforming limits of a conventional mortgage.  In order to qualify for a conventional mortgage the loan amount must be less than $715,000 in most counties, however, there are certain counties that will allow a larger amount based on the cost of living.

For example, some high-cost cities in California or Hawaii will go up to $970,800.00.  You would be surprised that most places applicants believe to be high cost, unfortunately, do not qualify for the exception.

Conventional Loan Guidelines

Now that we have discussed what a conventional mortgage is and the requirements to obtain this loan product, let us take a look at how this product fits in certain areas.  When looking into Nevada, we first need to find out what the average credit score is by state.  As of 2021, the average credit score in Nevada was 701 FICO.  What does this information tell me?

Conventional Loan Guidelines on Down Payment on Home Purchases in Nevada

The average person looking to obtain a conventional mortgage in Nevada will likely have to put 15-20% down payment.  The conforming loan limits for Nevada are $715,000.00 despite many homes on the market being offered for much more than that.  As of this writing, there are 19,272 homes currently on the market in Nevada, with a median price of $469,000.  This median price falls far below the conforming limit.

Conventional Loans in Nevada

Let’s take a look at Arizona to see how it compares to Nevada.  As of September 2022, the average credit score in Arizona is 710, which is slightly higher than in Nevada.  Unfortunately, it still falls short of the 740 credit score required to qualify for the minimum down payment allowed of 3%.

Conventional Loan Guidelines on Down Payments vs Mortgage Insurance

I would assume that the average down payment will be the same as those obtaining a conventional mortgage in Nevada at 15-20%.   Similar to Nevada, the conforming limits for Arizona are $715,000.00.  Despite increasing in value by over 13% over the last year, the average home price in Arizona is $432,850.  Again like Nevada, that price falls well below the conforming loan limits set by the FHFA.

How To Apply and Get Pre-Approved For Conventional Loans

The application process is very simple.  When you have decided to purchase a home, we strongly recommend you reach out to a lender to get pre-qualified.  When choosing a lender to work with you want to make sure they have your best interest in mind.

It’s true veterans do pay lower closing costs if they are use a VA home loan. The reason for this is because of “non-allowable” closing costs.

With a VA loan, the veteran can only pay 1% origination, appraisal, and other costs that pay for actual services…any other fees must be paid for by the seller or the lender. On a typical home purchase this can save hundreds if not more.

In addition to paying lower closing costs with a VA loan, the seller is allowed to pay the closing costs for the veteran.

To some veterans and real estate agents, the VA home loan process is often stopped because of the VA appraiser that is assigned to the loan.

This may sound like a disadvantage but I have witnessed occasions where it was actually a blessing to the veteran that was applying for the VA loan.

The reason that loans are sometime brought to a standstill is because of what is often thought of as the “dreaded” VA appraiser. In other words the VA appraiser assigned doesn’t assess enough value to the property that the veteran is trying to purchase or refinance. On other occasions I have seen them require repairs to the property that must be repaired before the lender will approve the loan.

Depending on what side of the transaction you are on this may seem like a curse but I really feel that it can be a blessing in disguise. If you are applying for a VA home loan to purchase a home you typically want to make sure that the home you are buying is really worth what you are paying.

When you apply for a VA home loan, the lender that you use will order the appraisal from the VA directly and the VA will assign an appraiser from their list of appraisers. The lender has no selection in the process and the appraiser is selected totally at random.

I was speaking with the appraiser that I call for local Texas conventional and FHA appraisals the other day and we discussed the VA appraisal process. When I told him those VA home loan appraisers were chosen at random from a pool of appraisers, he told me “that is the way it should be”.

Now, this appraiser is very trustworthy and works in a similar manner to a VA appraiser. He has done appraisals for me that have come in under value for good reason; however the majority of them work out just fine.

The reason he made this comment is that many appraiser out there only care about “making the value” and have loan officers and real estate agents trying to push the appraisal to a price higher than what is reasonable for the property.

When VA home appraisers look at a property, they not only look at the condition of the property but they are also looking at comparable homes in the area that have sold recently. They try to find homes that are very close to the house being appraised, in the same subdivision, similar square footage, similar quality and similar age, among other criteria. They will also point out noticeable flaws in the property and note these as well.

Here is an example; a couple months ago I was helping a military member that was purchasing a home. After a couple days of searching they finally located a home in an area that they wished to live in and decided to make an offer. The realtor they were working with advised them that other homes in the area were selling for more and that they already had an appraisal to support the sales price, however when the VA home loan appraiser inspected the home and compared similar sales in the area they found the house was worth much less. When we compared appraisals, we found that the only homes selling for more were actually larger, fifteen years newer and over a mile away. The other appraiser had failed to mention multiple properties within three blocks that had sold for much less, in fact an identical home three doors down had sold for $15,000 less. When the seller of the home was presented with this information, they actually did lower the price to the appraised value. The military member got a great deal on his home and his VA home loan closed shortly after.

Overall, what the VA home loan appraiser is actually trying to do is make sure that the home you are purchasing is really worth the price you are paying. That is why I feel that VA appraisers are actually a benefit instead of a disadvantage.

The United States of America is involved in a war like no other – the Global War on Terror. Those who have spent time on the front lines know that there is no other way to describe it – this is war at its worst. Those returning from active duty in this war are finding themselves facing the same issues that every other war veteran has faced over the years. Our veterans need to know that their country stands proudly in support of their service, and is ready to react to their needs. On March 6, 2007, President Bush established the Task Force on Returning Global War on Terror Heroes. This task force was to identify ways that a grateful nation could improve the delivery of Federal services and benefits to the service members and veterans of this War on Terror.

The results of the work of this task force were presented to the President on April 19, 2007. This report contains not only recommendations, but also a Government wide action plan for their implementation. Two of these action plans directly affect the processing of claims for VA loans. There are now processes in place to expedite the claims of veterans requiring adaptive housing Military Loans or Home Adaptation Grants Claims. The Task Force also recommended expanded eligibility for the SBA Patriot Express Loan among many other recommendations.

It is important for all veterans, including those who are serving or have served in the Global War on Terror, to understand the myriad of benefits that are available to them. These benefits, such as the VA home loan guaranties are there because Americans recognize the sacrifice that our forces make to help secure the freedom that we have come to take for granted. 9-11 brought this war to the USA in a very real way. The war on terror is no longer something that is happening in a small country halfway around the world. We need our soldiers, sailors, and airmen like we have never needed them before.

In today’s citizen/soldier armed forces with the increased number of reserve detachments serving on the front lines, we need to let them know that there are programs in place to help them take care of themselves and their families. Through VA home loan guaranties, they can get the best interest rates possible and purchase that new home or fix up the one they have with a secured, no down payment, VA guaranteed military loan. The details of the President’s Task Force can be found at http://www1.va.gov/taskforce/.

Today I received a phone call from a veteran that wanted to know what his rate and closing costs would be for a home purchase…after awhile, it developed into more of a conversation about the differences between a VA home loan and a Texas veteran home loan. I am going to be brief today and explain it in the next couple of days.

The main difference between the two loans is that a Texas veteran home loan has many more options but it also has more restrictions and slightly more paperwork.