What Does "May Not Qualify for Conventional Financing" Mean?
- Conventional loans are essentially loans that are obtained through a conventional bank or mortgage lender. Buyers who can afford the minimum down payment requirements and meet other lender expectations would typically go with a conventional loan. While conventional lenders may flex with down payments below 20 percent, they usually require an expensive private mortgage insurance product to offset the risk. Conventional lenders work directly with prospective home buyers and incur the financial risks of financing a home purchase.
- Generally, a 20 percent down payment is the most important qualifier to a conventional lender. This signals the lender that you are confident in your ability to repay your loan, otherwise you risk losing your home and your financial investment. However, you must also meet basic credit score requirements. If you have declared legal bankruptcy, typical conventional lenders will not offer you financing for at least two years, according to the MortgageLoanPlace website. After a property foreclosure, you would likely have to wait five years for another conventional loan.
- Fortunately for home buyers in the 21st century, you have some positive alternatives when you do not qualify for conventional financing. The Federal Housing Administration, or FHA, is the largest of the government-backed mortgage loan programs to which buyers can turn. The Department of Veterans Affairs (VA) and Farmer's Home Administration (FmHA) are others. The FHA has existed since 1934 and has been a part of the U.S. Department of Housing and Urban Development (HUD) since 1965.
- FHA loans were initially intended for first-time home buyers who could not meet the minimum down payment requirements of conventional financing. The borrower is required to pay for FHA mortgage insurance, which protects the lender in case of default. However, FHA mortgage insurance is usually less expensive than private mortgage insurance sometimes required for conventional loans. Though conventional loans are generally preferred by those who qualify, FHA is a very viable alternative in the early 21st century. A minimum down payment requirement of 3.5 percent, modest closing costs and easier credit qualifications attract many prospective home buyers, and even investors looking for a low-capital investment opportunity.