Conventional Loan Basics
- Conventional loans are common mortgages offered by most mortgage lenders and banks. These mortgages are available to borrowers who meet basic credit requirements and who can meet the common 20 percent down payment requirements. Borrowers able to cover the 20 percent down payment minimum, with good credit, usually get the best rate and terms on their mortgage loan through a conventional loan.
- Debt-to-income compares your monthly debt obligations, including mortgage, auto loan payments and personal loan payments, to your gross monthly income. The typical conventional lender's maximum debt-to-income ratio allowed is 36 percent. Mortgage-to-income is another common ratio used to determine your debt capacity. You can usually have up to 28 percent of your monthly income allocated to your mortgage payment with conventional loans. Some conventional lenders stretch these guidelines if you put more money down or have significant assets to prove your credit worthiness.
- FHA mortgage loans are an alternative to conventional loans for borrowers that cannot meet the 20 percent down payment or credit requirements of conventional lenders. Available since 1934, FHA loans are backed by the government and offered by the Federal Housing Administration, an agency of the Department of Housing and Urban Development. The borrower is required to pay mortgage insurance, which covers the increased risk of FHA mortgage lenders. FHA borrowers are only required to make a 3.5 percent down payment.
- FHA ratios are less flexible than conventional loans, but they are slightly higher because of the required mortgage insurance paid through monthly installments. The debt-to-income ratio on FHA mortgages is 41 percent. Mortgage-to-income allowed for FHA mortgages is 29 percent. Along with these standard debt ratios, FHA borrowers must also stay within prescribed maximum loan amounts, which vary by state and county depending on usual costs of properties in each area. Borrowers can search the HUD website for specific maximum loan amounts in each county.