What are traditional loan requirements?
We spend a lot of time thinking about what mortgage lenders need for borrowers: whether you personally qualify for a loan.
But the home you want to buy also has to qualify. The lender wants to know that they are making a solid investment.
Here are what you should know about the requirements for conventional loans in order to qualify for a conventional mortgage.
Check Your Traditional Loan Eligibility (Jan 5, 2021)
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Conventional or government loan requirements
Below we describe the home condition requirements for compliant mortgage loan.
Remember, “Compliant Loans” is a type of conventional mortgage that follows Fannie Mae and Freddie Mac guidelines. These loan programs are not supported by the federal government.
Government loan programs, including FHA loans, VA loans, and USDA loans, enforce their own housing requirements.
Additionally, the rules for non-compliant conventional mortgages – such as a jumbo loan – may be slightly different.
However, the following home equity requirements apply to most conventional mortgages.
Conventional loan requirements
Traditional requirements for loan houses are pretty mild. In-depth home inspections are usually not required. However, there are some basic real estate standards.
Fannie Mae's rules for conventional, compliant loans state that the house must be:
A single family home or apartment building with no more than four residential units can be purchased with a loan amount within after your down payment current compliant credit limitsThe hotel is located in the United States, Guam, Puerto Rico or the US Virgin Islands. Residence in nature. Safe as a property with the good title “Safe, solid and structurally safe”. Insurable against flood and house risks. Easily accessible via roads that meet local standards Local standards Suitable for year-round use
In addition, a home valuation is usually required to verify the property's value.
The home appraiser will review the general condition of the property and compare it to similar recently sold homes in the neighborhood to determine its current market value.
Remember, a home valuer does not examine the condition of the house in detail for structural problems or imperfections in their systems. That is the job of a house inspector.
With a traditional loan, lenders typically do not require a home inspection. It is up to the buyer whether they get one or not. But they should, and we explain why below.
Although an inspection is not required, lenders may have unwritten requirements for the condition of the home.
For example, with just a few lenders you can buy a home that is clearly unsafe – unless you have thorough plans to repair the home and the funding to do it is in place.
In addition, traditional lenders can have rules related to features such as:
Wells and septic tanks – If these are shared, you must have access rights to them. And you need an enforceable maintenance agreement with the neighbors who share itEnvironmental hazards – Things like buried oil storage tanks can degrade the value of the homeSolar modules that are financed and secured – You are a home secured debt that can complicate thingsProperties that span multiple parcels – There are rules for their location and use
You can also expect problems if the home you're looking to buy has termites or some other pest infestation. contains materials with asbestos or leaded paint; or has moisture penetration or the presence of radon gas.
In such circumstances, you or the seller will usually need to eliminate the problem as a condition of your mortgage approval.
Is the lender informed of potential problems?
As a home buyer or refinancer, you can hope the lender will not notice a problem. Maybe after closing it, you will fix it. While not recommended, this is common. How will the lender find out about problems?
As explained below, there is a good chance the appraiser will find obvious deficiencies in the assessment. This will cause the lender to request a specialist inspection for this problem. The lender reviews the specialist's report and determines how to fix the problem.
The lender will not close the loan until you or the seller have completed the fix.
Traditional home ownership requirements are rarely an issue
Relatively few properties are stumbled upon by traditional loan house requirements because of their lenient nature.
If you're looking to buy in a location that is particularly remote or unusual, your pool of willing lenders may be small.
But the vast majority of homes go through appraisals and inspections with minimal effort and only minor identified defects.
Check Your Traditional Loan Eligibility (Jan 5, 2021)
Conventional credit check requirements
One of the main requirements for a traditional loan is that the home must be valued. The appraiser's job is to determine the real market value of the property.
Usually they do this by comparing the property to other, similar homes in the neighborhood that have recently been sold.
The main job of a valuer is to protect the lender by making sure they are funding no more than the home is worth. The appraiser also protects the buyer.
Sellers can set asking prices at any level they want. And many ask for more than the house is really worth on the open market.
So the appraised value protects you from paying too much for a home. And it protects the lender by making sure they can get their money back by selling the home in case of foreclosure.
This protection is why your mortgage lender always needs a conventional loan rating.
Occasionally an assessment leads to an inspection
Over the years, a skilled appraiser could acquire knowledge of construction techniques and structural problems. If you discover a major problem with the house, you can list it on your report.
If so, your lender may need a specialist to investigate this issue. For example, paint chipping on the outside of an older home can trigger a cue from the appraiser that the area should be checked by a lead paint specialist.
However, it is not the assessor's job to investigate such errors or even to report them unconditionally. Your only job is to assess the value of the home.
This means that buyers shouldn't rely on an appraiser to find structural problems or other defects in the home. For their own safety, buyers should order an independent third party home inspection to ensure they are not purchasing a surprise fixer upper.
Check Your Traditional Loan Eligibility (Jan 5, 2021)
Conventional home inspections
While traditional loans don't require a home inspection, it is in the buyer's interest to get one. A home inspection report can provide valuable information that is not shown in a home evaluation.
For example, a home inspector might find:
Problems with the foundation or structure of the house Roof or flooring that needs repair Heating, cooling, plumbing or electrical systems that are faulty or need replacing soon Insulation that needs to be replaced Hidden termite damage or other pest infestation
Each of these problems can cost thousands of dollars. A home inspection gives the buyer the opportunity to negotiate repairs with the seller before becoming a new owner.
Without a home inspection, the buyer will have to pay out of pocket for any repairs discovered as a new homeowner.
The lender doesn't need to do a home inspection as they don't have to pay for home renovations. Therefore they are not required.
However, as a buyer, you should read up on potential issues and the likely cost of resolving them before making a purchase.
House inspection costs
The only real downside to a home inspection is its cost, although the home inspection fees aren't astronomical.
HomeAdvisor estimates that the nationwide median cost of a 2,000-square-foot home in 2020 ranged from $ 279 to $ 399, though the bills occasionally incurred over $ 500. And it suggests you add $ 25 for every additional 500 square feet of floor space.
For many homebuyers, this is a small price to pay for the security that such an inspection brings. Imagine spending $ 350 to save $ 10,000. This is not uncommon. You will know that the crack in an interior wall or foundation that you noticed is not a sign of a serious problem. Or that it is and you should find another place to buy.
Also, you can potentially use your home inspection report as a leverage to bring the selling price down or get the seller to pay for repairs before you move in.
Home inspection checklist
If you decide to do a home inspection, your first task is to choose a good inspector.
Consumer Reports (CR) suggests that you start with referrals from local friends and family members. And then you go online to screen your candidates.
The American Society of Home Inspectors (ASHI), the International Association of Certified Home Inspectors (InterNACHI), and the National Academy of Building Inspection Engineers are professional associations that could help, according to the CR.
What a home inspection usually covers
A home inspection usually includes the following:
Heating systemCentral air conditioning (temperature dependent) Indoor installations and electrical systemsRoof, including visible insulationWallsCeilingsFloorsWindows and doorsFoundationBasementStructural components
It is important to note that home inspectors cannot check every inch of the house and typically do not dig soil, penetrate walls and ceilings, or generally have access to inaccessible areas.
So be realistic about your expectations. For a few hundred dollars, you can't expect a complete demolition to find a leaky pipe. However, you can expect the resulting damp stain to be highlighted.
Talk to your house inspector before and after the inspection
It is good to speak to your house inspector before and after the inspection. Describe beforehand everything that bothers you and that you want to examine particularly carefully.
Suppose you noticed a crack in the masonry of the foundations. That could be a very costly mistake. Or you are concerned that the wiring is out of date and may not match the code.
You can expect them to pay close attention to them and either provide security or sound the alarm. However, don't be surprised if they suggest calling in a specialist to investigate certain issues further.
What if my inspection report has a lot of flaws?
Most houses (including some new ones) have a list of shortcomings. So go over them with your inspector to assess how serious they are.
Should you ask $ 300 off the asking price to fix a few minor issues? Or $ 30,000 to lay the foundations?
Your home inspector can give you a lot of worry about home buying. Yes, you still have the stress of real estate agents, loan officers, paperwork and endless questions. However, your inspector can allay your greatest fear: you are buying a mine of money.
What if my house needs a major renovation?
What if you want to buy a home that doesn't meet the basic requirements of a traditional loan?
Many lenders will allow you to buy a property that does not initially meet all of the guidelines. However, in order to get the mortgage approved you will need detailed plans to update the house before closing it.
It gets difficult here.
In most cases, you can't just promise to fix the house after you close it. The lender knows some buyers won't get away. Even if you have additional funding and detailed repair plans in place, the lender will need to make corrections before closing.
However, the seller is often unwilling to make costly and time-consuming repairs. They want to sell the house now.
Often times, the buyer is willing to get the job done or pay for repairs if they really like the house. However, it would be unwise to do so: the seller could sell the house to someone else and benefit from your work.
But there are ways to get around these situations.
For example, the Federal Housing Administration has FHA 203 (k) rehab loan to finance a home purchase and renovation with a single mortgage. Fannie May also has a HomeStyle renovation loan, while Freddie Mac offers CHOICERenovation mortgages, both of which are compliant loans.
If you are planning on purchasing a fixer-upper, you will likely need one of these specialty rehabilitation loans in place of a standard traditional mortgage. And this type of loan will be associated with their own condition and renovation requirements.
Other conventional credit guidelines
Traditional loans don't meet many housing requirements. However, they enforce strict guidelines as to which borrowers are eligible for a home loan.
In addition to selecting an approved property, you – the borrower – typically need to meet the following guidelines to qualify for a conventional mortgage:
A credit score of at least 620 and a clean credit report Stable, two-year employment and income history, in most cases a 3% or more down payment (although a 20% down payment can avoid private mortgage insurance) A debt ratio of income to Income (DTI) less than 45%, in most cases a loan amount within the appropriate loan limits Cash reserves at the bank
The stronger your personal finances, the easier it will be for you to qualify for a mortgage loan.
These factors also affect your interest rate.
For example, having great credit or paying a large down payment can lower your mortgage rate and save a lot of money in the long run.
Any lender can tell you if you and the home meet normal loan requirements. However, you should seek quotes from at least 3 mortgage lenders to ensure you are getting the best possible interest rate.
Check your new plan (January 5, 2021)