Last Updated on June 10, 2021 by Maggie Sutton
With interest rates currently near all-time lows, more and more people are looking to buy a home. Almost everyone will need to secure a loan to pay for the house once they find one. One of the most common mortgage loan options is a conventional home loan for healthcare workers. Find out what makes a conventional home loan so popular, and how Homes for Heroes can help you secure one.
What Are Conventional Loans
Over half the mortgage loans in the U.S. are conventional loans, making them the most popular home loan choice. Conventional home loans for healthcare workers are able to be backed through mortgage companies, banks, and credit unions. Unlike government-backed loans, conventional home loans have lower down payment terms, no upfront funding fees, and have more favorable mortgage insurance terms.
Advantages of Conventional Loans
- You can use a conventional loan to purchase a second home or a rental property.
- There is no restriction on the use of the house you buy, so you can use the property to make financial gains.
- You can choose to have a fixed interest rate, which means the interest rate does not change throughout the loan’s life.
- They have a higher limit you can borrow, compared to government-backed loans.
- Conventional loans have more flexible term lengths, like 30, 20, 15 and 10 year terms.
- Requires as little as 3% of the purchase price for down payment.
- There are no up front funding fees like with government-backed loans.
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 wish to avoid Private Mortgage Insurance (PMI), you’ll need to pay more than 3% for the down payment – usually 20% to avoid PMI.
- It is up to each lender to decide if they are willing to finance you the money. This can make qualifying tougher than with government-backed home loans, which have standardized requirements.
Conventional Loan vs. Government-Backed Loan
Conventional loans are what we call home loans that are not government-backed (such as FHA, USDA, and VA loans). They are offered by private lenders such as banks and mortgage companies. Their terms are different from government-backed loans as well, which are typically 30 years or more. Conventional loans also require higher credit scores than government-backed ones, most commonly around 620. Government-backed loans have limited or no closing costs, and they can sometimes be rolled into the loan. With a conventional home loans for healthcare workers, closing costs need to be paid up front or at closing. For most government-backed loan types, 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 healthcare workers. The interest on home loans is determined by how much it costs the bank to borrow you the funds, which is the interest rate. The more it costs the bank to borrow, the higher your interest rate is going to be. Mortgage companies will also look at your financial profile, or how likely you are willing to and be able to pay the loan back. 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 healthcare workers 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 because you will be paying for less years, 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.
To qualify for a conventional home loan for healthcare workers, you will typically need to have a credit score of 620 at the lowest. Some lenders have a higher minimum, so make sure to talk to your lender and ask what their requirement is. Your lender will also ask about your debt to income ratio, which should be around 36%. This means that your debts should 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 at the closing on your home as well. 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:
The mortgage company will not give you a loan unless you can prove that you have a regular, stable income. Most lenders will require that you provide two months of pay stubs showing year-to-date income, two years of federal tax returns, and sixty days worth of statements of any assets you have. You will also need to provide W-2 forms from two preceding 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 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. If you are putting 20% or more, all of the down payment can be a gift. But, if you’re putting down less than 20%, only part can be gifted and the rest must come from you. 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 typically 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. It is a good idea to give them a heads up that there might 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 home searching.
The lender will also need personal identification articles like your social security number, a copy of your driver’s license or state ID, and your signature so that they can pull your credit report.
Still not sure if you qualify for a conventional home loan or another type of home loan? Sign up now to talk to a Homes for Heroes mortgage specialist. 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. Homes for Heroes mortgage specialists can save you hundreds of dollars, while 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. Talk to a Homes for Heroes mortgage or real estate specialist to start your home buying journey!