Last Updated on May 12, 2021 by Maggie Looker
The conventional home loan is the mortgage most people get to finance a home. But is it the best loan for you? We walk through the key elements of a conventional home loan, the pros and cons, and why a conventional home loan for law enforcement professionals is a smart option for any home buyer.
What Are Conventional Loans
The most popular home mortgage loan in the U.S. is a conventional loan. Conventional home loans for law enforcement are available through mortgage companies, banks, and credit unions. Unlike government-backed loans, like FHA, USDA, and VA loans, conventional home loans have lower down payment terms, no upfront funding fees, and have more favorable mortgage insurance terms. Law Enforcement officials who are first time home buyers can even qualify for conventional mortgage loans. It’s no wonder that over 60% of home mortgage loans are conventional loans.
Conventional Loan vs. Government-Backed Loan
Conventional loans refer to loans that are not government-backed. They are offered by private lenders such as banks and mortgage companies. Their terms, like length to pay back or what the house can be used for, are different from government-backed loans, and are typically less-strict. Conventional Loans require higher credit scores than government-backed ones, typically at least 620.
Government loans also require smaller closing costs, while conventional home loans for law enforcement do not. 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.
Advantages of Conventional Loans
There are several reasons why conventional loans are a wise choice, including:
- Conventional home loans can be used to purchase a second home or a rental property. There is no restriction on living in the home full time.
- The interest rate is fixed, meaning it does not change throughout the loan’s life.
- Conventional loans for law enforcement can have a higher loan limit than government-backed loans.
- Your down payment can be as low as 3%.
- There are no up-front funding fees.
- Conventional loans have more flexible term lengths and down payment amounts.
Another reason to go with a conventional loan is the sellers. Most times, when a seller is presented with multiple offers that include attractive offers through a government-backed loan, they tend to favor conventional loans. People perceive that conventional loans will have less challenges than government-backed loans, which is just simply not true.
Cons of Conventional Loans
- You’ll need a higher credit score. Typically, credit scores of 620 are needed, versus as low as 500 for a FHA loan.
- A down payment of 20% or more is necessary if you wish to avoid Private Mortgage Insurance (PMI).
- It is up to each lender to decide if they are willing to finance you the money because these loans are not backed by the government. This can be a challenge for first time home buyers with either lower credit scores or lower down payment amounts.
Conventional Loan Interest Rates
Interest rates for conventional home loans are slightly higher than government-backed mortgage loans for law enforcement, such as FHA loans. The interest on home loans is determined by the market rate of how much it costs the bank to borrow you money. The more it costs the bank to borrow, the higher your interest rate is going to be. They also look at your financial profile, which tells how likely and able you are to pay the loan back. Remember that higher interest rates make your loan more expensive over the life of the loan. Currently, however, interest rates are at or near historic lows, which means now can be a smart time to get a deal on a mortgage.
Getting a conventional loan 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 in interest over time. However, keep in mind payments almost always go up in total dollars you’ll pay each month when the amount of years goes down, even with a lower interest rate. This is because the total amount borrowed is the same, but you have a shorter timeframe to pay it back.
To qualify for a conventional home loan for law enforcement, you will typically need to have a credit score of 620. Some lenders do have a higher minimum, since it is up to their discretion who to loan money to. Make sure to talk to your lender and ask what their requirement is before getting too far. Your lender will also ask about your debt to income ratio, which should be around 36%. This means that your debts (car loan, current mortgage, credit card debt, etc.) do not make up more than 36% of your total income. You will also need to provide proof that you have at least 3% of the down payment, although having 20% or more can help you avoid Private Mortgage Insurance (PMI).
A lender needs to verify whether you can afford the down payment and monthly payments for the loan you need. A good rule of thumb is that your mortgage payments should not exceed 28% of your monthly income. A conventional loan has a variety of other costs that you must pay upfront when closing on your home. These include origination fees, broker fees, underwriting fees, and closing costs. Don’t forget about homeowners insurance, an appraisal and inspection before you get to closing either. Lenders must verify that you can afford these costs. Here are some of the items your lender will ask for to consider you for a loan:
Proof of Income
The mortgage company or bank will not give you a loan unless you can prove that you have a 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 statement of assets (things like investment accounts). You will also need to provide W-2 forms from the last two years.
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 and investment account statements to prove that you have funds. 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 that does not need to be repaid. Before accepting the gift, talk to your lender so they are aware of the gift and can direct you on how to conduct the transaction properly.
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 your employment status and salary. In case you changed employers recently, they may also contact your previous employer. The same goes for your spouse, or any other person who’s name will be on the mortgage loan.
We understand that as a law enforcement professional, proving reliable, stable work hours can be more difficult than someone with a typical office job. Homes for Heroes mortgage specialists understand the unique employment challenges that police, corrections officers, and other law enforcement professionals face. We’ll work with you to make sure you have everything you need to submit your application for a conventional loan.
Still not sure if you qualify for a conventional home loan? Sign up now to get more information and ask any questions you have from our mortgage specialists. Our mortgage specialists are not only skilled in working with conventional home loans, they’re also skilled at working with the heroes in their community.
Ready to start house hunting? While Homes for Heroes mortgage specialists can save you hundreds of dollars, our real estate agents can save you thousands. For every $100,000 in home price, our real estate specialists will send you a check for .7% after closing. On average, our law enforcement heroes save $2,400 when using our real estate and mortgage specialists. Talk to a Homes for Heroes mortgage or real estate specialist to start your homebuying journey and save money along the way.