In Atlanta, Georgia, buying a home requires a lot of money. The solution is a home loan, and one of the most popular loan programs available is a conventional mortgage.
Conventional loans are very popular in the Atlanta housing market. Conventional loans fall into two categories: conforming loans and non-conforming loans. These are differentiated by the conventional loan limits set by Fannie Mae and Freddie Mac, two entities overseen by the federal government.
When you take out a conventional mortgage, you borrow money from a private lender to afford the cost of the home. In return, you sign a contract to repay the original amount plus interest over time. Owning a home with a conventional loan comes with significant financial benefits, primarily the ability to build equity and profit from it in the future.
Let’s discuss the qualification process for a conventional loan and what you should know about preparing to buy a home with this loan product.
Understanding Conventional Loan Requirements
Not everyone will meet conventional loan qualification requirements. These loan programs are only available to borrowers with a certain level of financial stability. Private lenders avoid giving out loans to risky borrowers because they could lose money on those deals, so unless it is a government-backed loan, the borrower must be deemed safe to lend money to.
Some metrics that will determine your qualifications include your credit score, down payment, and debt-to-income ratio, which will be explored below.
Minimum Credit Score Needed
Your credit report is a reflection of your ability to pay back debts. A low score shows that you are not entirely reliable at handling your payments or do not have a long credit history. If you want to qualify for conventional loans in Atlanta, you will likely need a credit score of 620 or higher.
Some conventional lenders could make exceptions for lower credit scores if you put forth a larger down payment or have a low debt-to-income ratio. A higher credit score will help you qualify for more competitive conventional loans.
Down Payment Guidelines
The down payment is the amount of money you pay upfront to cover the cost of the home. Usually, the minimum down payment required to take out a conventional loan is 3% of the house's purchase price.
However, it is recommended to aim for a 20% down payment or higher. If you reach this number, you won’t need to pay private mortgage insurance, which will add to your monthly payment.
The larger your down payment, the smaller your total loan amount will be, so your monthly mortgage payments will be lower.
Debt-to-Income Ratio (DTI) Explained
Your DTI ratio measures your monthly debt obligations compared to gross monthly income. The lower this ratio, the less risky you are considered as a borrower. You can calculate your DTI ratio by dividing your monthly debt obligations by your monthly income. Multiply this number by 100 to get a percentage.
Typically, most lenders will only approve conventional loans for borrowers with DTIs of 45% or lower. Exceptions may be made up to 50% if your finances are strong in other areas.
Step 1: Review Your Financial Health
Before pursuing conventional home financing, you must assess your financial health. Check your credit score and start implementing strategies to improve it, such as paying down other debts, reducing your revolving utilization, or avoiding credit inquiries. Look at your savings to see what type of down payment and closing costs you can afford with a conventional loan.
Step 2: Save for a Down Payment
If you can pay a large amount upfront for your home, it will save you money in the long run. Consider starting a down payment fund and adding money as soon as possible. Some prospective buyers will take on side gigs to increase their funds for a home loan down payment.
Down Payment Assistance in Atlanta
Many down payment assistance programs exist for potential buyers, especially those purchasing their first homes. The Atlanta Housing DPA Program could make you eligible for up to $20,000 in assistance as a first-time homebuyer.
Another option is the Georgia Dream Homeownership Program, which provides affordable financing, down payment and closing cost assistance, and education for new homebuyers.
Step 3: Gather Required Documentation
Applying for conventional loans requires a lot of paperwork. You must provide numerous documents to the mortgage lender to process your application. Documentation used in the underwriting process includes government identification, tax returns, pay stubs, proof of assets, bank statements, financial gift letters, and income statements.
How to Organize Your Paperwork?
You must organize your paperwork to speed up the process of applying for conventional loans. Compile all your financial documents into one folder, such as pay stubs, income statements, and bank statements.
Separate personal identification information into another folder. As the conventional mortgage application is processed, obtain updated documents, such as more recent pay stubs, and put them into these folders.
Step 4: Get Pre-Approved for a Loan
Pre-approval for a conventional loan is a key step when in the market for a house in Atlanta.
First, getting pre-approved will give you an accurate picture of what you can afford and how the monthly mortgage payment will look. Second, a pre-approved conventional mortgage will show sellers you are a serious buyer. Lastly, if a seller accepts your offer, you can finalize your conventional loan much faster if you have received pre-approval.
Step 5: Shop for Competitive Rates
Interest rates greatly affect the total cost of your loan and monthly payments. A higher interest rate will mean larger payments and a higher loan total amount. If you can access more competitive interest rates, you will save thousands and thousands of dollars throughout the loan. Mortgage companies will offer you better interest rates if you have a high credit score.
Shop for the right lender to see what interest rate they can offer on a conventional mortgage. Also, consider the impact of an adjustable-rate mortgage versus a fixed-rate mortgage.
Step 6: Understand Private Mortgage Insurance (PMI)
Lenders are more likely to approve larger loans if borrowers can only manage a down payment of less than 20%. The lender wants to minimize the risk somehow. The primary way to do this is by charging mortgage insurance each month. In the early years of the loan, the borrower will pay an additional percentage each month in the form of mortgage insurance premiums.
You can avoid this extra expense by paying at least 20% of the home's sales price upfront.
Step 7: Choose the Right Lender
You must choose a lender who offers conventional loans. If qualifying for a conventional loan is difficult, you will need a lender with other products, such as Federal Housing Administration (FHA), VA, or USDA loans. When choosing a lender, consider aspects like customer service, loan terms, interest rate offerings, and fee transparency.
Step 8: Submit Your Loan Application
Many applications for conventional loans can be completed entirely online, though you can always go to an office in person or talk to a representative on the phone. You will complete the necessary information and attach all required documents before submitting. Your conventional loan will then enter the underwriting process.
What Happens During Underwriting
Underwriting simply means processing conventional loans. The lender reviews the borrower’s financial background and documents to determine if they should be approved for a loan. This process can take some time, ranging from a few days to several weeks.
The loan officer reviewing your application may request additional documents during this time. The sooner you respond, the faster your mortgage loan may be approved.
Step 9: Prepare for Closing
Eventually, you will make an offer on a home, and the seller will accept it. A closing date will be chosen, which is the day when the transaction is finalized.
The closing day meeting will involve signing many documents, often with an attorney present, and the final transfer of funds between the buyer, seller, mortgage lender, and banks. The closing paperwork will initiate the repayment phase of your conventional mortgage loan.
Common Mistakes to Avoid During the Loan Process
Borrowers can make many mistakes when applying for conventional loans. Some common errors include not saving enough for a down payment, not checking credit scores, missing important paperwork, or ignoring pre-approval.
How TrueWay Mortgage Can Help You Qualify
TrueWay Mortgage helps Atlanta homebuyers navigate the complex world of real estate transactions. Whether you qualify for conventional loans, FHA loans, or another product, our team can guide you through the application process to secure a mortgage that works for you. Contact our team today at 404-962-0032 to discuss your dreams of homeownership.
