News & Tips
How to Get a Conventional Mortgage: A Guide Through the Loan Process
Conventional mortgage loans are the most common form of mortgage loans taken out today—and this term encompasses an umbrella of loan programs that aren’t guaranteed by the federal government. For example, because the US government backs FHA and VA loans, they aren’t conventional. To help, this post will guide you through the process of getting a conventional home loan, from its options to its requirements.
First Versus 2nd Mortgages
A first mortgage is the primary (first) lien placed on a home by a lender. If you have a need to cash in on your home’s equity—and you haven’t paid off the first mortgage—then this would be a secondary lien.
First and 2nd Mortgage Rates
Lenders base their interest rates, in part, on the amount of risk they’re taking by approving a loan. Second mortgages are riskier from the lender’s perspective because if the borrower can’t meet their obligation and the house goes into foreclosure, the first mortgage would get paid off first. For this reason, 2nd mortgage rates are typically higher.
Preparing to Apply for a Conventional Mortgage
From this point on, unless otherwise noted, we’re referring to first mortgages—and, before you actually apply, you can:
- gather information about loan programs at lenders of choice
- estimate what you might put down for a down payment (remembering to keep enough cash for closing costs, moving expenses, and so forth)
- consider whether you’re interested in a fixed-rate conventional loan or an adjustable rate
- compare the interest rates and annual percentage rates (APRs) currently being offered
- estimate what payments might be for different terms (for example, 15 years, 20 years, and 30 years; this article covers 30-year vs.15-year fixed-rate mortgage)
Interest rates can be partially based on your credit scores. So, it’s a good idea to investigate yours and ensure that no errors appear on your credit reports that could incorrectly bring scores down. You can get a free credit report from each of the three major credit agencies at AnnualCreditReport.com. These are reports, not scores. There are numerous sites that provide credit score information, sometimes for free and other times for a fee.
Conventional loan lenders have leeway in their requirements, with credit bureau Experian noting that a minimum FICO® score required is usually around 620 out of a total of 850. SCCU Members can see their FICO score for free in their Online Banking account.
Consider seeking mortgage preapproval. This lets you know how much house you can afford, saving you time and frustration when house hunting. A preapproval involves checking your credit (versus prequalification, which doesn’t), so a preapproval letter demonstrates to a seller that you’re well-positioned to buy, which can give you an advantage.
Here is more information about mortgage pre-qualification. When you’re ready to apply for yours, be sure to have the following at hand:
- ID, such as your driver’s license/passport
- two most recent bank statements
- last two pay stubs/W-2s/tax returns
SCCU guidelines include a credit score of at least 620 with a record of making payments on time and a good debt-to-income (DTI) ratio. To calculate your DTI, add up all your monthly debit payments, such as your mortgage/rent, and for your vehicle, credit cards, personal loans, and so forth. Then calculate your monthly gross (pre-tax) income. Divide your debts by your income and the resulting percentage is your DTI. Lenders typically look for borrowers to have a DTI lower than 45%.
Note: Your DTI will have your new mortgage payment included. Here is a quick way to estimate yours based on the rate and term you plan to apply for.
|Term||Rate "As Low As"||APR* "As Low As"||Example Loan Amount||Example Monthly Payment|
|10 Years - Purchase or Refi||6.375%||6.656%||$200,000||$2,258.26|
|15 Years - Purchase||6.500%||6.700%||$200,000||$1,742.21|
|15 Years - Refinance||6.625%||6.826%||$200,000||$1,755.99|
|20 Years - Purchase or Refi||7.000%||7.163%||$200,000||$1,550.60|
|30 Years - Purchase||7.000%||7.125%||$200,000||$1,330.60|
|30 Years - Refinance||7.125%||7.251%||$200,000||$1,347.44|
HOME LOANS: Rates based on creditworthiness. Mortgage loans are originated by Space Coast Credit Union and are subject to credit approval, verification, and collateral evaluation. Programs, offers, rates, terms, and conditions are subject to change or cancellation without notice. Certain restrictions apply. Taxes and insurance not included; your actual payment obligation will be higher.
These mortgage loan programs constitute first mortgage liens secured by the home and property. Your down payment is determined by the Loan-to-Value ratio. (90% LTV = 10% down payment). Loans exceeding 80% of the appraised value of the home require private mortgage insurance. Member responsible for any funds needed for closing costs (unless member attached a No Closing Costs option to loan) and pre-paid escrow.
More About Credit Scores And DTIs
First, conventional home loans come with numerous benefits. They’re flexible with plenty of options to choose from, including fixed-rate conventional loans and adjustable rate ones in a range of loan terms. This makes it easy to find a loan program that might fit your needs.
You typically have flexibility in the amount of your down payment and, even if you need to pay PMI until you have 20% equity in your home, you can cancel that insurance once you’ve achieved that equity. Contrast that to FHA loans, for example, where you must pay this kind of insurance throughout your loan if you put down less than 10%. Plus, when you have good to excellent credit scores, you can benefit from the best rates available.
That said, credit score requirements are more stringent for conventional loans than for FHA and VA loans. If you need to improve your credit scores to qualify for a conventional loan, tips include:
- Check your credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) and work with them to correct any inaccuracies that may hurt your credit scores.
- Make sure all payments are made on time, and if it helps, set up automatic payments to stay on schedule, making sure enough funds are in the account to cover those expenses.
- Pay down credit card accounts if you’re using more than 30% of available credit. This will help to improve your credit utilization rate, which can have a positive impact on your scores.
- Consider keeping credit cards open, even if you don’t use them, because your credit history plays a role in your overall credit scores.
- Pay attention to your credit mix. It can help to have a mix of revolving debt (such as credit cards and lines of credit) and installment loans, such as personal loans and car loans.
As you improve your credit scores, keep a keen eye on your DTI ratio. If the rate is too high, having good credit will likely not be enough. To lower your DTI, prioritize your credit card and personal loan debt in one of two ways: by interest rate and by balance. Then make minimum payments on all of them and put as much extra money as you can on the debt that’s at the top of your list. Once you pay off one debt, focus on the next—and monitor how this lowers your DTI ratio.
Conventional Mortgage Application: Decisions to Make
Once you’re ready to apply, you’ll need to make decisions about key aspects of your mortgage loan, including:
- Fixed-rate conventional loan versus an adjustable one
- Down payment amount
- Closing costs
- Terms and payment
Here’s more about each.
Fixed-Rate Conventional Loan Versus Adjustable
A fixed-rate conventional loan has the same interest rate and principal and interest payment throughout the length of the loan. This can be a good type of loan to choose if you appreciate a consistent payment amount and find it easier to manage your budget that way. Plus, it’s a straightforward, easy-to-understand type of loan.
An adjustable rate mortgage (ARM) starts at a lower interest rate (and, therefore, a lower principal and interest payment), which can help you to build equity early on. Interest rates on ARM loans can go up and down in future years, so it can be harder to budget for monthly payments with this type of loan because of its variance. It’s important to understand and weigh the possibilities so you can proceed with confidence.
Down Payment Amount
Traditionally, people made a 20% down payment with loans, but nowadays, you can make a smaller down payment and then purchase PMI that insures the lender in case of default. PMI is typically added to your monthly payment until the borrower reaches the 20% equity mark.
Sometimes, a no down payment mortgage loan can make sense. For example, you may have a good income and credit scores with manageable debt levels—but you don’t have enough in savings for a down payment for the home you want. SCCU Team Members can help you decide if a no down payment mortgage is right for you.
Closing costs can run into the thousands of dollars, but there are no closing costs mortgage loans that significantly reduce how much upfront money you’d need to close on your home loan. This can be especially helpful for first-time homebuyers who can’t leverage the equity in a current home to finance their new one. At SCCU, when you’re ready to upgrade from a No Closing Costs Mortgage loan, there isn’t a prepayment penalty or hidden restrictions.
Term and Payment
To calculate what your monthly principal and interest payment would be, you need to have certain pieces of information:
- Purchase price - down payment = loan amount
- Interest rate
- Loan length
You can then enter this information in our home mortgage calculator to see what your principal and interest payment would be.
Applying for a Conventional Mortgage
Typically, you can apply for a mortgage loan online or at the branch of a financial institution. Be prepared to provide personal demographic information, such as name, address, phone number, date of birth, and Social Security number. Have proof of employment and income, according to the lender’s guidelines, along with information about your assets and debts.
At SCCU, we make it easy for you to find the right conventional mortgage loan. Click on our listing of mortgage loan types and then on the mortgage program of choice, such as these options:
Once you click on the type of mortgage loan, you’ll find a description of the loan, its features and benefits, current interest rates/APRs, terms, and fees. You can click on buttons to find information, use calculators to find payment information, and much more. You can also click to “Apply Now.”
You can find information about 2nd mortgage rates here.
Hero Mortgage Program
SCCU also offers a Hero Mortgage Program where people serving on the front line in our communities can benefit from exclusive rate discounts. For example, our hometown heroes can take an additional 0.25% off our already low rates.
Bank Versus Credit Union Mortgage Loans
When seeking a conventional mortgage loan, consumers can choose between a bank or a credit union for their lender. Numerous benefits exist when selecting from credit union home loans because credit unions are not-for-profit financial cooperatives that are specifically created to benefit its members. Members of a credit union are part of a niche financial institution that’s designed to enhance their financial wellness. Contrast that to banks where the interests of stockholders must be considered.
So, how do you become a member of a credit union? They are created for and managed for people who live in a particular geography or work in a certain profession. SCCU serves 500,000+ members who live in the following geographies: these counties in Florida. If you live in this region, you become a member simply by opening up an account at one of our 60+ branch locations from Flagler to Miami-Dade counties or opening one online.
Benefits of becoming a credit union member include the following:
- Credit union home loans have rates that are usually lower than at a bank.
- Fees are typically lower for a credit union mortgage as well.
- Profits are returned to members in this way, as well as through higher interest rates on savings products.
- Loan decision-making is local, and as a member, you may have a better chance at getting your mortgage loan approved.
- Employees provide personalized service, which can include education about financial wellness.
Plus, when you become a member, you’re supporting your community.
Credit Union Home Loans at SCCU
We were founded in 1951 as Patrick Air Force Base Credit Union, so you can see why the Hero Mortgage Program harmonizes with our service mission from the start. SCCU began with 28 members and $372 in assets. Now, we’re Florida’s third-largest credit union with $7 billion in assets.
At SCCU, you can count on competitive credit union mortgage loan rates with flexible programs and terms. Plus, because decision-making is local, the approval process is more streamlined. For the ultimate convenience, we offer online applications, electronic closing options, and free mobile/online banking.
If you have questions, feel free to call the branch nearest you:
- Brevard: 321-752-2222
- Broward: 954-704-5000
- Miami-Dade: 305-882-5000
- All Other Areas: 800-447-7228