There are many different types of loans that are available for you as a home buyer, but the conventional loan is perhaps the most comprehensive. Combining the freedom that comes with additional trust from the lender with the flexibility and benefits of a package with standards, the conventional loan is a great choice for many borrowers. However, there are questions that you should get asked and answered before committing to anything. Here are the top 11.
1. What kind of bank statements should I bring into my lender?
Although there is no limit to the financial statements that a lender will accept in order to establish consistency and level of income, the historical minimum is usually one year of bank statements for W-2 employees and two for self employed people. There is no hard and fast rule here; if your lender asks for more information, give them more information if you can.
2. What should my cash reserves be?
Because the conventional loan does not ask for nearly as much help with origination and closing costs as, say, a loan from the Federal Housing Administration (FHA), you should always have at least five percent of the approximate range of housing price that you are considering in a separate account to cover them.
3. What does my credit score need to be?
If you have a credit score that is at least 700, you should not have any trouble here. Your goal should be 740; this is the level that automatically triggers the best deals from the computers that front the automated portion of the banking systems. If you pull your credit and find that your score is below 740, take the time to improve it to that level if you can. The time will definitely pay for itself in the form of lower interest rates that will save you five or six digits on your home loan.
If your score is below 600, you may have trouble here, and you should definitely put off your negotiations until your score has improved.
4. Do I need to bring in tax returns?
Two years of tax returns is usually enough to quell any lender questions here, which tend to come more often if you are self employed. Tax records will solidify your income if you do not have a pay stub structure for your business. Sidenote: Bankers love to see self employed people who are paying themselves through an LLC or similar legal business structure.
5. How long does my credit history need to be?
Your payment record does not have to be of any particular length. What is more important is paying your other creditors on time. If you do not have many items on your credit report, bring in letters of reference. Landlords are a great reference, as are letters from long time employers, although they are not necessarily creditors. Long time employment shows stability.
6. What kind of property am I buying?
Although there is no definitive limitation on a conventional loan, you will definitely impress your lender if you are looking at properties that are more likely to maintain value. Your lender will insist on an appraisal anyway, so make his job easier from the start.
7. What other fees should I prepare for?
You will eventually need to hold fees for inspections and appraisals in escrow. Your lender will be very happy if you have thought of this up front. There will also be fees for lawyers and the government. These escrow fees are unavoidable, and although you may be able to roll them up into the loan or push them into the closing costs, you will eventually have to pay them. Show the lender that you have already accommodated all of this.
8. What large assets do I have?
You may want to secure your loan with assets that you have already built equity in. This will help your lending terms. However, these items will need to be quite high value items, and you may need to incorporate a specialty bank to give you the credit line if you are talking about a niche asset such as investment art.
9. Should I include a guarantor in the negotiations?
If you are looking for a conventional loan, you may need to include a guarantor if you do not have a long credit history. The guarantor is a third party who signs onto the loan and guarantees to pay if you default. A guarantor can also lower your risk profile and get you a better interest rate: They are often used as a strategy as well as a fulfillment.
10. Why should I choose a conventional loan over a government sponsored loan?
Government sponsored loans have many upfront benefits, to be sure. Lower down payment requirements and looser credit requirements are certainly appealing. However, if you meet the criteria, you pay tens of thousands of dollars less over the life of the loan, maybe hundreds of thousands of dollars.
11. What kind of down payment do I need?
Get 20 percent of the total home value ready in cash up front for your down payment. You will be able to create immediate equity in the property that resists many negative property market forces and avoid charges that include the private mortgage insurance (PMI) payment.
