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How To Qualify For A Conventional Loan

To qualify for a conventional loan you must conform to the lending practices and rules of the lender you apply to for the conventional mortgage loan.  The lender makes the rules.  As long as they are within the law in their state they can do pretty much what they want.

However, market place competition will generally put them in the neighborhood of some generally excepted guidelines.

Normally, when you apply for a loan, lenders are interested in three things:

  1. They want to know about both your income and expenses. There are generally accepted ratios that many lenders use to determine if they are interested in giving you a loan… More on that later.
  2. What is your credit score.  Your credit score tells the lender what they can expect from your loan.  They use your score as an indication as to whether you will make your payments on time and whether they are likely to have trouble getting you to payback your loan.  I discuss your credit score below.
  3. The overall pattern of your credit experience to date.  I discuss this in detail near the end of this article.

Ratios That If You Qualify For A Conventional Loan

There are actually two qualifying ratios that lenders are interested in.  Both qualifying ratios are based upon your monthly income and monthly expenses.

First, they want to know the ratio of your housing related costs (Principle, Interest, PMI, Home Owners Insurance, Taxes, etc.) to your income.  The guideline that many lenders use is 28%.  This means that your housing cost in the conventional loan must be in the area of 28% or better.  Less is better.

Second, lenders want to know the ratio of your non-housing related expenses to your gross income.  Your non-housing related expenses must be 36% or less of your income.

Credit Score To Qualify For A Conventional Loan

Credit Scores are determined using any of several systems.  The most well known is the FICO System.  FICO stands for ” Fair Isaac and Company.  Most people must have at least a 600  FICO credit score to qualify for a conventional loan; some lenders require a score of 620.  Fair Isaac is used by the Experian credit reporting company.

The other two major credit reporting companies are Equifax and TransUnion.  Equifax’s model is called BEACON and the system used by TransUnion is called EMPIRICA.

Each of the 3 major credit bureaus determine your credit worthiness score base upon four factors:

  • Credit History – For how long have you had credit and how much do you use it?
  • Payment History – Are your bills paid on time?
  • Credit Card Balances – How many accounts do you have and much do you owe on each? You need several but too many will raise red flags to the lender.
  • Credit Inquiries – How often have you had your credit report pulled?   More is bad.

While all three scoring systems use the same information, they put different weights on different factors plus other considerations.

What Kind Of Credit-Related Problems Have Your Had?

This area is almost totally subjective.  It depends on the lender, the loan officer and the rules in the state.  Remember, conventional loans are always at the discretion of the lender so if you have had problems there may be some “wiggle room” if you approach it right.

Most lenders want you current on all your bills and want you to have no “lates” in the preceding 12 months.  Other things that they look at are law suits, judgments, liens against your property, a pattern of late payments, etc.  Frequently they will ask for written explanations of problems; which are your chance to convince the lender that they were isolated instances and probably will not happen again.

Normally lenders want at least 2 years from the discharge date on Chapter 7 bankruptcies before they will consider you for a loan.  And, during that two years you must have had no significant credit related problems. Also, they will probably want a written explanation of why you are in that situation and why it will not happen again.

If you are in a Chapter 13 bankruptcy, they will probably want a written explanation of why you are in that situation and why it will not happen again, you must be paying on time and as expected according to your court approved repayment plan and you will probably need to get written approval from the court appointed trustee for your case.

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