A mortgage is a mortgage. These entities underwrite traditional mortgage products, which means that they create the rules and regulations related to these products. The federal supervision for these programs comes from the US Department of Housing and Urban Development (HUD).
Down Payment
Traditional mortgage products require a down payment of 5 percent of a home’s cost. In a refinance, the 5 percent equity rule is appropriate as well. A borrower should have a minimum of 5 percent equity in the house to have the ability to refinance a conventional mortgage. Furthermore, a greater down payment may be required if the debtor has a credit score under 620. This down payment requirement may be as high as 20 percent.
PMI: Private Mortgage Insurance
Private mortgage insurance or PMI is charged to a debtor when he has less than 20% equity in the residence. This insurance covers the lender in the event that the borrower defaults on the debt. Therefore, the only party in the trade is the lender. To avoid this charge, a borrower should either make a down payment of 20 percent or more, or procure subordinate funding to pay for the required funds.
Credit Score
Credit score requirements for conventional mortgages vary by lender; however, generally the minimum credit score for a conventional mortgage is 620. Some creditors, however, will underwrite mortgages with credit scores as low as 580; it’s only up to each lender as to what score is the cutoff. A borrower with a lower credit score is considered to be a greater risk than a borrower with a higher credit score.
Credit Report
A borrower’s credit report is assessed by the lender to determine his willingness and ability to repay a new mortgage debt. If the borrower has any liens or judgments on his credit file, they need to be paid in full before procuring a conventional mortgage. Furthermore, conventional mortgage requirements say that a borrower has to be a minimum of 2 years discharged or dismissed by a bankruptcy so as to meet the requirements for the new debt. Last, any late payments on a recent mortgage of 30 days or after in the last 12 months automatically disqualifies a debtor from a conventional mortgage, even if other requirements are met.
Debt to Income Ratio
The debt to income ratio is utilized by creditors to rapidly decide on the amount of a borrower’s income that is strictly dedicated to debt repayment. The greater the debt to income ratio, the more likely that the borrower is over his head . The preferred debt to income ratio for most conventional mortgage companies will be less than 30 percent, but with specific cases creditors will qualify a borrower with a ratio around 40 percent. This is a lender to lender decision and case by case scenario, however.