Conventional Home Loans for Educators

Last Updated on June 9, 2021 by Maggie Looker

At Homes for Heroes, we want to see every hero join the ranks of homeowner. This includes educators and teachers. To buy a home, you’ll most likely need to take out a mortgage loan. But how do you choose? One of the most common mortgage loan options is a conventional home loan for educators. Find out more about this type of home loan and how Homes for Heroes can help you secure one.

What Are Conventional Loans

Conventional loans are the most popular type of home mortgage loan in the U.S.; in fact, over 60% of all home loans are conventional. Conventional home loans for educators are available through mortgage companies, banks, and credit unions.

Unlike government-backed loans like FHA, USDA, and VA loans, conventional teacher mortgages have lower down payment terms, no upfront funding fees, and have more favorable mortgage insurance terms.

Advantages of Conventional Loans for Educators

You can use a conventional loan to purchase a second home or a rental property. There is no restriction on the type or use of the house you buy.
Conventional loans can have fixed interest rates, meaning that the interest rate does not change throughout the loan’s life. They can also have adjustable rates, meaning the rate is lower at the beginning of the loan and then adjusts monthly.
They have a higher maximum loan limit compared to government-backed loans.
Conventional loans have more flexible term lengths, like 30, 25, 20, and 15 year terms.
Requires as little as 3% of the purchase price for down payment.
There are no up front funding fees.

Disadvantages of Conventional Loans

Higher credit scores are required to secure a conventional loan. Typically, credit scores of 620 are needed, versus as low as 500 for a FHA loan.
If you do not want to pay monthly Private Mortgage Insurance (PMI), you’ll need to pay 20% for your down payment.
It is up to each lender to decide if they are willing to finance you the money, which makes qualifying guidelines tougher than with government-backed home loans.

Differences between Conventional Loan and Government-Backed Loan

Conventional loans refer to loans that are not government-backed (FHA, USDA, and VA loans). They instead are offered by private lenders such as banks and mortgage companies. Conventional loans also require higher credit scores than government-backed ones, typically around 620.

Government-backed loans have limited or no closing costs. With conventional home loans for educators, you’ll need to pay some closing costs and pay a down payment of at least 3%.

There are fees with most of the government-backed loans that you’ll need to pay for as long as you have to loan. This helps offset some of the cost and risks with offering no down payments. With a conventional home loan, if you put 20% down, you’ll have no fees on your loan. If you put less than 20% as a down payment, you’ll need to pay mortgage insurance until you’ve paid back 20% of the house’s value in principle.

When you get a government-backed loan, the house you buy must be your primary residence, while conventional loans allow you to buy a second home, cabin, or investment property.

Conventional Loan Interest Rates

Interest rates on conventional home loans are slightly higher than government-backed loans for educators, such as FHA loans. The interest on home loans is determined by how much it costs the bank to borrow you the funds. The more it costs the bank to borrow, the higher your interest rate is going to be.

Remember that higher interest rates make your loan more expensive over the life of the loan. Currently, interest rates are at or near historic lows, which can be a great time to get a conventional loan.

Getting a conventional loan for educators while interest rates are low means a few things. For one, you will most likely not need to refinance your mortgage any time soon, which will save you money on refinancing closing costs.

You might also be able to afford a conventional loan in a shorter term interval, for example, 20 years instead of 30 years. By reducing the number of years on your mortgage, you will pay less interest, saving you thousands of dollars. However, keep in mind that monthly payments almost always go up in total dollars when the amount of years goes down, even with a lower interest rate.

Loan Qualification

To qualify for a conventional home loan for educators, you will need a credit score of 620. Some lenders have a higher minimum, so make sure to talk to your lender and ask what their requirement is before you get too far into the process.

Your lender will also ask about your debt to income ratio, which should be around 36%. This means that your debts do not make up more than 36% of your gross income.

You will also need to provide proof that you have at least 3% of the down payment, usually by providing them with your asset information. But, having 20% or more can help you avoid Private Mortgage Insurance (PMI). A good rule of thumb when buying a home is that your mortgage payments should not exceed 28% of your monthly income when you add the payment to your debt to income ratio..

A conventional loan has a variety of other costs that you must pay at the closing. These include origination fees, broker fees, underwriting fees, and closing costs. Lenders must verify that you can afford these costs as well. Here are some of the items you must give your lender to be considered for a loan:

Proof of Income

The mortgage company will deny your loan if you cannot prove that you have regular, stable income. Most lenders will require that you provide thirty days of pay stubs showing year-to-date income, two years of federal tax returns, and sixty days worth of statements of any assets (401k, life insurance policy, etc.) you may have. You will also need to provide W-2 forms from two preceding years.

Assets

As mentioned above, the lender needs to know that you can afford to make the mortgage payments and the down payment. They will need to see bank statements and investment account statements to prove that you have money for it.

Sometimes, people will have a family member or friend gift them the money for a down payment on a home. In order for that to happen, there must be documentation that this money is in fact a gift and does not need to be repaid.

Before accepting the gift, talk to your lender so they are aware of the gift. They can direct you on how to conduct the transaction properly. Also, make sure to get the transaction letters notarized.

Employment Verification

Lenders only give money to people with a stable work history. Although you must provide pay stubs, the lender may call your employer to verify that you are still currently employed there. In case you changed employers recently, they may also contact your previous employer.

It is a good idea to let your HR department know there will be an inquiry about your employment. This can prepare your HR department and they can have your files ready. Any delays in obtaining this information can cause delays in your approval and ultimately, your home search.