Conventional Mortgage Loan Requirements 2022

Are you a first time home buyer considering buying a home and want to use a conventional loan? What are the Conventional Loan Requirements for 2022? How do you get approved for a conventional loan? In this video, we discuss conventional loans in more detail from the credit score required, minimum down payment needed to what is required with regards to employment and as well as the new conforming loan limits.

Are you a first time home buyer new to the home buying process and wondering what it takes to get approved for a loan to purchase a home well in today’s video we’re going to go through the conventional loan requirements for 2022 we’re going to touch on everything from credit score required to down payment to what you need with regards to employment and job status

And we’re also going to touch on how much income you need to make versus how much debt you have to give you an idea of whether conventional loan is even a good fit for you now the one thing i want to point out early in this video is conventional loans are usually a little less flexible than other types of loan programs out there like fha loans or va loans now

Conventional loans are not backed by the federal government again like fha and va therefore their requirements are a little more strict when it comes to qualifying so if you don’t qualify for a conventional loan you might try one of the other loan programs out there because typically they allow higher debt to income ratios as well as lower credit scores but for

Today’s video we are going to talk about conventional loans and towards the end of the video we’ll talk about fha and va and usda and some other types of loan programs just in case conventional loans aren’t a good fit for you now typically when talking to first-time home buyers they want to know what credit score they need they want to know what down payment they

Need they want to know how much income they need to make in order to purchase a home so that’s really where we’re going to focus our attention today and we’re also going to address some commonly asked questions that first-time home buyers have when going through the loan process in order to kind of make this a an all-encompassing video so that you have a really

Good idea of what’s required when you’re ready to start that home buying process now the very first thing i want to touch on in today’s video is credit score because credit score seems to be the one piece of the puzzle that either you know gives you an opportunity to buy a home or completely throws you out of the process altogether and conventional loans while

They’re flexible on their credit scores they do have a minimal credit score of 620 in order to use conventional financing so that means if you have less than a 620 credit score conventional financing probably isn’t going to work with you now one thing you need to understand about lower credit scores like 620 is that with conventional financing you’re typically

Going to have much higher interest rates you’re going to have much higher mortgage insurance when you put less than 20 percent down and we’ll talk about mortgage insurance and down payments here in just a minute but the lower credit scores tend to get hit with much much higher fees when doing conventional financing versus you know an fha loan for that matter so if

You do have lower credit scores just understand you’re likely going to pay a much higher interest rate and much higher mortgage insurance premiums every single month because of that credit score so it might be in your best interest to try to get that credit score up so that you can get much more favorable terms if you’re considering using a conventional loan now

One thing i want to point out in the environment that we’re in right now lower credit scores can be more of an issue more of a hurdle if you will with some lenders out there they might have overlays on their programs that don’t allow certain credit scores you might go into a bank per se you might go to a credit union and they might say well because you’re below a

640 or a certain number you can’t get a loan just understand that’s their guidelines not the actual guidelines put out by fannie mae or freddie mac so if you’re getting a no just understand that there might still be an option for you if you meet all the other requirements of this loan which we’re going to talk about here in just a minute now one thing i want to

Point out and a lot of people have questions about is where do you start if you’re looking to get a loan do you go into your bank do you talk to a credit union both of those are good sources but they usually have overlays on their programs i would recommend talking to a mortgage broker someone that has access to multiple lenders may even have access to the bank

That you went into or the credit union you went into because typically their terms are a little bit more favorable their rates are able to be shopped quite a bit more because they can go out to different lenders they have different guidelines sometimes than those of banks and if you need a lender you’re having questions about where to start do me a favor check out

This link below i’ll connect you with a lender who does conventional financing and can also compare your loan against fha or usda depending on where you’re located in the country so that you have a really good idea of whether or not conventional financing is even the best loan for you they can compare you against all of them so that link will take you to a mortgage

Professional and get you connected if you don’t have one that you know like and trust now the second thing i want to touch on in today’s video is down payment because outside of credit score down payment is usually the biggest concern for most first-time home buyers now conventional financing they only allow a three percent down payment now usually three percent down

Payments are associated with first-time home buyers in this case any buyer can use the three percent down option as long as they meet all the other requirements with regards to conventional financing now understand you can use this loan more than one time that’s one something that i do want to point out you can get as many conventional loans in your lifetime as

You want um you’re not restricted to a certain number the three percent down option is for anyone not just for first-time home buyers but one thing to keep in mind with that three percent down option you are going to have a higher interest rate than those putting more money down and if you have a lower credit score and you’re putting only three percent down you’re

Likely going to pay a premium across the board in order to get that loan that’s why it pays to have a bigger down payment it pays to have higher credit scores because typically those loans offer much better terms all the way around but conventional financing does allow a three percent down option now keep in mind something i mentioned a moment ago is that you’re

Going to have mortgage insurance when you put less than 20 down and you purchase a home you have something called mortgage insurance pmi essentially what it is is it’s protection for the lender in case you default on the loan it’s like a monthly insurance that you pay every single month when you put less than 20 down on that home now i often get people asking if

I pay my balance down to 20 or you know my home appreciates by a certain amount and now i have 20 equity can i get rid of that mortgage insurance and the answer is yes you can absolutely get rid of that mortgage insurance once you have 20 equity in that property now i don’t want to get into all the nuances of refinancing or the mortgage insurance falling off but

If you have questions do me a favor put them in the description below and i’ll get back to you with the answer on how that works but you get 20 equity in that property it falls off now i also get people asking well can i just pay a fee up front not to have mortgage insurance the answer is no every single loan putting less than 20 down is going to have mortgage

Insurance now you will hear some lenders out there say well we have a loan where you put less than 20 down and you don’t have mortgage insurance just understand it’s built into the interest rate you are paying for that mortgage insurance in some way right it may not be a separate fee that shows up every single month but you’re likely getting a much higher interest

Rate to cover that mortgage insurance which may mean that you’re paying even more than you would if you just paid the monthly mortgage insurance by itself so just understand when you’re getting a conventional loan you’re putting less than 20 down you’re going to have pmi every single month on that loan until you have at least 20 equity in that property in addition

To the 3 option that you have when using conventional financing you can also put five percent down 10 down 15 20 25 30 any amount you want down above and beyond that three percent now typically speaking the more money you put down the higher your credit scores the more favorable the terms are going to be with that loan so just keep that in mind when you’re going

Through the process now the third thing i want to talk about today is debt to income ratio what is debt to income ratio it is how much monthly debt you can have versus how much income you make in order to qualify for a loan now if that sounds really confusing understandably so but just understand there is no certain amount of income that you need to make to own

A home but you have to meet certain debt to income requirements in order to qualify for a conventional loan now i’m going to walk you through an example here to give you an idea now the conventional loan requirements for dti is 43 which means that you can’t have more than 43 percent of your monthly debt going toward housing expenses and credit card expenses car

Payments all of those expenses every single month now before we dive into what that actually means just understand that number is a bit flexible i have seen it go as high as 48 49 for conventional loans and get approved but that’s usually when you know the client has you know excess money in the bank putting a large amount of money down as far as the down payment

Goes and also has high credit scores so if you have all of those things chances are that number is probably a little bit flexible but if you’re on the the lower credit score side the lower down payment side you’re likely going to be stuck somewhere around that 43 to 45 debt to income ratio now let’s take a minute here and talk about debt to income ratio to give

You an idea of how it works if you’re completely confused by my statement a moment ago how they calculate it is they take your gross monthly income and divide it by your monthly debts including your housing expenses so let’s say for example you make a hundred and twenty thousand dollars a year just because it makes simple math that makes ten thousand dollars a

Month so your gross monthly income before taxes is ten thousand dollars per month now let’s say you have a car payment that’s a thousand dollars per month you have a credit card bill that’s a five hundred dollar minimum monthly payment you have student loans for five hundred dollars so that’s two thousand dollars per month that you have in monthly debt now let’s say

That you’re going to buy a home and the mortgage on that home is roughly twenty five hundred dollars so that means you got twenty five hundred dollars for the mortgage you’ve got the thousand for the car the 500 for the student loans the 500 for the credit card so you’re forty five hundred dollars per month in total expenses well if you divide that by ten thousand

Which was your gross monthly income you’re at a debt to income ratio of 45 now as i mentioned a moment ago 43 is the cap now there are times when that number can be flexible as i mentioned but in this case you might be above and beyond the allowable debt to income ratios in this example so that may or may not be doable based on other circumstances in your loan

Your credit score how much money you’re putting down all that stuff i mentioned a moment ago but that’s essentially how debt to income ratio works now one thing i want to mention is it’s super important that you work with a professional when going through this process don’t just call the call center online or get the number off you know the radio ad and call to

See if you’ve been pre-approved talk to a mortgage professional someone that knows the business understands the business has experience and can guide you through the process and if you’re talking to someone on the phone and they’re just asking you questions and you’re not providing any documentation understand that’s not a real qualification you need to fully be

Pre-approved which means that you need to provide bank statements tax returns w-2s they’re going to run your credit in the process to see exactly how much you can afford to purchase now that is what a pre-approval is and it pays to work with a professional now if you need one i did put a link in the video earlier and i also have one in the description below so check

That out if you want to get connected with someone that can guide you through that process and another thing i want to talk about in today’s video is loan limits conventional loans only allow you to borrow so much money depending on where you’re located in the country now there are areas that are considered low cost and there’s areas like california where i am

That are considered high costs so depending on where you’re located in the country will determine how much money you can borrow using conventional financing now what i’m going to do is throw the loan limits up here on the screen i’m going to throw the low cost areas as well as the high cost areas so that you know exactly how much you can borrow in those areas now

Understand this isn’t the purchase price this is how much you can borrow the max in your area is 647 200 which is you know the low cost max loan limit then that means that’s the max you can borrow if you wanted to buy a 700 000 home and you have the difference you know for the down payment and you qualify then that means you could qualify for a conventional loan

This is just the max that they’ll allow you to borrow from the bank when doing a conventional loan now as i mentioned a moment ago the low cost is six hundred and forty seven thousand two hundred what the two three and four means there is that if you were to buy units if you were to buy two unit property that has a higher loan limit than just one unit if you were

To buy three units or four units you have a higher loan limit so if you’re planning on buying a multi-unit property you can actually borrow up to one million two hundred and forty four thousand eight hundred and fifty dollars for a four unit building now i often get people asking well what are units it’s when you buy a multi-family property right i would say when

It has four doors right four front doors on a property that’s a four unit property it’s kind of hard to explain we have a lot of them here in southern california but it could also be four single-family homes on one lot that could also be considered a four-unit property typically how these are structured is you live in one and rent out the other three so if you live

In a multi-unit property say a four unit you live in one unit rent the other three out and one nice thing about that is you can actually use the income from those other three units in order to help you qualify for the mortgage which is really nice now i’m going to talk about this more in just a minute with regards to investment properties and conventional financing

But i also wanted to touch on the loan limits for high cost areas like where i’m located so the high cost for conventional financing for one unit is 970 800 and it goes all the way up to 1 million eight hundred and sixty seven thousand two hundred and seventy five dollars for four units now what i mentioned a moment ago is investment property right people often

Ask can i use conventional financing and buy investment property and the answer is absolutely yes it just requires a larger down payment i think the minimal for an investment property at the moment is 15 down but the terms are not going to be favorable at all typically you want to have 20 to 25 down 25 is usually what i recommend just because the terms are more

Or less the best the conventional is going to offer when you have that down payment and the last question i want to answer with regards to investment properties people often ask well if i live in it as my primary for a period of time can i eventually turn that property into an investment property at some point in the future and the answer is yes yeah if you buy

Conventional financing as your primary home you live in that home you can turn it into an investment property after say a year of living in that home which means that you could go out and get a new loan you know conventional financing on the next home house hacking if you will a lot of people out there are considering doing house hacking and you can do that with

Conventional financing now the last thing i want to talk about in today’s video is income and employment right we’ve had a lot of craziness over the last two years with regards to the pandemic people losing jobs so it’s important to know what’s required if you’re going through the home buying process typically lenders want to see two years of employment consistent

Income now i know during this you know last two years people have been laid off people have taken absences from jobs lenders are a little bit more flexible these days with regards to you know these different circumstances so it pays to you know to run these scenarios by a lender just to make sure that you meet qualifications but what they want to see is you know

Typically you in the same line of work for a two year period what that means is you know if you’re in sales they want to see you in sales for a two year period if you’ve been you know a school teacher you’re essentially a teacher uh you know for a two-year period now what they don’t like to see is going from a w-2 job or you’re a paid employee to being self-employed

Unless you have two years of self-employment right there’s a lot of little nuances in there and that’s why it’s important to work with someone that understands what they’re doing and then also it comes down to income right can your income fluctuate absolutely but typically you want to see consistent income during that same period they’re usually going to want to

Look at two-year history of income either verified by w-2s or tax returns in some cases they want to see both especially if you’re self-employed and they want to see that income pretty consistent it can increase but they don’t like to see huge jumps in income either now it doesn’t mean you can’t qualify it just means it might be calculated in a different manner so

Understand when getting approved for a loan not only do you have to meet the requirements that i mentioned you know a moment ago in this video but they’re also going to want to verify that information by looking at pay stubs w-2s tax returns bank statements right that’s another important one they want to see where the money’s coming for the down payment for the

Closing costs there’s all these different little nuances in when getting finance that you’re going to have to verify and that’s just part of the process and another thing i’d like to ask a favor if you found any value in this content at all do me a favor hit the thumbs up feel free to share it with someone you know that might be buying a house using conventional

Financing and feel free to hit the subscribe button if you want to stay updated on information like this like loan programs as well as housing market updates to keep you up to date on everything with regards to real estate now earlier in the video i mentioned you know giving you loan requirements for fha loans va loans and usda loans and in order to keep this video

Short what i thought i would do is just throw a link in the description below to each one of those videos so that you can have an idea of what each one requires without me shortening them here in this video and that way you can find out which loan is the best for you and also if you’re watching this now and you’re wondering which loan is cheaper between fha and

Conventional there’s a lot of misinformation out there do me a favor check out this video here i dive into it in more detail show you some examples for different credit scores to show you which one is actually the better loan in a couple of different scenarios but for now i appreciate you taking the time to watch i appreciate the support hope to see you again soon have a great day bye

Transcribed from video
Conventional Mortgage Loan Requirements 2022 By Jeb Smith