Understanding Bank Home Loans: A Conventional Mortgage Guide

Are you planning to buy your first home? Maybe you're looking to upgrade to a bigger place, or perhaps you're adopting a minimalist approach. Whatever your situation, understanding how conventional mortgage loans operate will help you set the right home-buying budget.

In this article, you'll learn the basics of bank home loans. It guides you through the mortgage process, from deciding if a conventional loan is right for you and how to qualify for one. Read on!  

What Is a Conventional Mortgage?  

A conventional mortgage is offered by private lenders like banks and credit unions. It's a straightforward option, but it can be more challenging to qualify for than government-backed alternatives.    

To get a pre-approval, you need a good credit score and a decent down payment. However, if you meet the criteria, you might enjoy lower interest rates, less paperwork, and more flexible mortgage terms. For instance, a Standard Chartered home loan could help you secure the funding you need to purchase that charming two-bedroom you've been dreaming of without dealing with extra government paperwork.

You could also use conventional home loans to refinance your current home. However, remember, that every loan has its pros and cons. Talk to a financial advisor to see if a conventional mortgage fits your unique situation.

Types of Conventional Mortgages   

Bank mortgages come in two main types:   

Conforming Loans   

Conforming loans offer a popular path to homeownership. These standardized mortgages follow guidelines set by major mortgage buyers, and their borrowing limits vary by location. This means they adapt to different housing markets.   

Before you start house hunting, research your area's loan limits. This will help streamline your home-buying process and help you plan effectively.   

Non-Confirming Loans   

Non-conforming loans, also known as jumbo loans, exceed the borrowing limits of standard mortgages. They're designed for buyers who are eyeing pricier homes or properties in expensive markets.   

But with higher loan amounts come stricter rules. Lenders usually demand excellent credit scores and substantial down payments. Interest rates tend to be higher, too.

Despite the challenges, these loans open doors to luxury properties or homes in high-cost areas. If you're dreaming big, a non-conforming loan might be your key to that dream home.  

How to Qualify for a Conventional Mortgage   

Qualifying for a conventional home mortgage loan involves meeting specific criteria set by lenders. Here are a few tips to help you meet the requirements:  

Improve Your Credit Score   

Your credit score can make or break your home loan deal. For conventional loans, lenders typically want a score of 620 or higher. But don't aim for the minimum; instead, try to get it as high as you can.   

A higher credit score opens more doors. For instance, with a 750 score, you might get a 3.5% interest rate. Meanwhile, a 620 score could mean 5% or higher. That difference can save you thousands over the life of your loan.  

Work on improving your credit score before house hunting. Pay bills on time, reduce debt, and check your credit report for errors. These steps can help you secure better loan terms and a lower monthly mortgage payment.  

Pay a Larger Down Payment   

Down payments can make a big difference in your home loan. While 20% is the standard requirement, you can still opt to pay larger amounts.   

Some mortgage lenders offer conventional loans with just 3% down. That's a great deal for getting your foot in the door, but it comes with trade-offs. You'll likely face higher mortgage rates and extra costs like Private Mortgage Insurance (PMI).  

Putting more money down has perks. It can boost your approval odds and shrink your monthly mortgage payments. For instance, on a USD$300,000 home, a 20% down payment saves you about USD$250 per month compared to a 3% down.  

Consider your budget and long-term goals when deciding. A bigger down payment now could mean significant savings later.  

Prove Your Employment Stability   

A solid work history and reliable income can significantly increase your chance of loan approval. Mortgage lenders evaluate your employment record and earnings to assess your ability to repay.

Frequent job changes can raise concerns, but extended tenure demonstrates dependability, so aim for longevity with your employer. While your income matters, consistency is equally crucial.

For self-employed individuals, detailed financial records are essential. Freelancers and gig workers should focus on establishing predictable income patterns. Lenders value financial stability, regardless of whether you're a traditional worker or an entrepreneur.   

Consider Your Debt-to-Income Ratio    

Lenders will also examine your Debt-to-Income (DTI) ratio to assess your ability to handle a mortgage. This ratio measures the percentage of your monthly income dedicated to debt payments.  

For conventional loans, aiming for a DTI of 43% or lower is generally recommended. This means your total monthly debt payments, including the potential mortgage, shouldn't exceed 43% of your gross monthly income. For example, if you earn $5,000 per month, your total debt payments should ideally be $2,150 or less.  

The lower your DTI, the better your chances of securing a loan with favorable terms. A DTI below 30% is often seen as excellent and can qualify you for better interest rates.  

To improve your DTI, consider paying off high-interest debts like credit cards or personal loans before applying for a mortgage. This can significantly boost your chances of loan approval and secure better terms.  

Conclusion   

Understanding conventional mortgages is an essential step toward achieving your homeownership goals. This type of loan can provide you with a straightforward path to purchasing or refinancing your home. However, qualifying for a conventional mortgage requires a solid credit score, a reasonable down payment, and a stable financial history. Remember, every borrower's situation is unique, so consulting with a mortgage professional can provide valuable insights and guidance.