Let's learn everything that you need to know about getting a Conventional Loan in 2022. So one of the more frustrating or anxiety-inducing things in the home mortgage buying a home process is figuring out which loan is going to be best for you. There are four main types of loans. There's conventional, there's FHA, USDA, and VA. And you will also learn here if conventional is the right option for you, or not.
Now conventional tends to be more is seen as the standard or more traditional loan option. And it's the most widely used in conventional loans that are going to be better for higher credit scores and minimal credit issues.
So for most people, what this is going to look like is if you're at a 680 credit score or higher conventional is likely going to be your best loan option. Now conventional does go down to a minimum of a 620 credit score compared to other loans that go down to 580 or even 500. This does add a little bit more of a restriction, but 680 and higher is going to be your best bet for conventional.
So when we're talking about conventional, it's usually somebody that doesn't have a lot of credit issues. Usually, they have some money to be able to put down. However, this does create a myth that used to go around, and I still find it comes up every once in a while that you need 20% down to get a conventional loan. Not true at all.
The minimum down for first-time homebuyers is 3%. So 3% of the purchase price for some people. This is 5%. If you're not a first-time home buyer. You do not need 20%.
So there are two main types of conventional loans. Conventional is just a type. It's not a specific loan or I think of it just like a blanket terminology. There are two main government-sponsored enterprises. So basically think of them as companies that the government helps along a little bit that oversees the majority of the rules for conventional loans.
These are Fannie Mae and Freddie Mac. We don't need to know too much about them, but basically, these are the organizations that make the rules for most conventional loans.
Now you can use this for a primary home, so home that you're going to be moving into and living in for at least a year. Also, a secondary home. Think of something like an Airbnb or a vacation home that you're going to live in for a part of the year, but rent out the rest and then investment. This would be that you're renting out long-term that you will not be in yourself.
So what is conventional again, it's a type of loan offered by many different lenders. It's not just offered by one specific lender. And in fact, pretty much, I don't know of a lender that doesn't offer conventional loans. It comes into a few different varieties with a few rural differences.
So for instance, there are things like HomeReady or Home Possible. There are standard loans, there's a home one. But just be aware that what we're talking about here is the main general rules of conventional, and there will be slight differences between each of these different types of loans.
And we talked about Fannie Mae and Freddie back already. For instance, this HomeReady is Fannie Mae's product, Home Possible is Freddie Mac's. They're both extremely similar. But they're just created by two different organizations.
Now with most conventional loans, when you get approval. Mortgage approval, it's often given by computer software that's called AUS. This is an Automated Underwriting System.
What this is doing is it's basically taking your loan application. It's looking at your credit score, your income, your employment, and it's judging how risky it is to lend money to you. And it either gives you a thumbs up or a thumbs down. So either an approval or denial on your mortgage.
So most conventional loans are going to be underwritten through this software that gives you approval. So just keep that in mind, as you're talking with a loan officer that's, what's happening on your loan application, it's not just some like a Wizard of Oz person behind a curtain.
Talk through a loan officer, they're there to help guide you through this process in seeing what is the software want. Keep in mind too, that because this is software-based, for most approvals that it can change.
Sometimes one week somebody with a 680 credit score with 5% down might have an easy time getting approved. Then a week later that might become a little bit more difficult and the underwriting software might want to see extra money in your bank account to get that approval. So things do change. Talk with your loan officer about that. If you run into any issues.
So with COVID obviously a lot changed. With lending, there were a lot of rules that were put in place because giving out money became riskier and lenders wanted to make it less risky. So there are some changes that have been a little more reversed since we're on what seems to be the backend of COVID at this point.
So there used to be a lot of credit score overlays. Overlays are when there are the base rules given out by Fannie Mae and Freddie Mac, and then lenders can actually tighten those down a little bit. They can make them more strict if they'd like to it's called a lender overlay.
There were a lot of lenders who had overlays of a 640 minimum. It appears that those are disappearing for a lot of lenders. However, that still might be the case for some.
Also for self-employment, what you needed was a year date, profit, and loss. If it was unaudited, you need three bank statements showing your employment income. So right now a lot of lenders are still in place.
Future employment is now allowed. For a while, that was being paused just because of a lot of layoffs and furloughs that were happening with COVID.
Then we've also got some additional guidance from Fannie Mae and Freddie Mac about traveling nurses because that is, has been a lot more common since COVID. And what you need here if you are a traveling nurse is one year minimum with previous nursing experience. That's one year of minimum traveling nursing experience with previous non-traveling nursing experience.
I know that can be a little tricky here, basically what this is preventing is somebody who, as a nurse, may be used to make $80,000. And all of a sudden, now you're making $8,000 per month. You can't just use the $8,000 per month, and I know some nurses who are doing that. You can't use that to buy a house because that income is not stable. You need to have a history of earning that income for at least one year with previous nursing experience. So I know that doesn't apply it to everybody.
Now let's talk about some down payments. This is where a lot of confusion happens for conventional loans. Again, we talked about the 20% myth. So if you're a first-time homebuyer, you can put a minimum of 3% down. So a first-time home buyer means that you haven't been on title to a home in the past three years. So if you're applying with two people, only one person has to be a first-time homebuyer.
Now if you are a second-time home buyer, it's 5% down as the minimum. There is one stipulation to this, even if you're a second-time buyer, if you qualify for HomeReady or Home Possible loan, then you can still do 3% down.
HomeReady and Home Possible do have an income limit though. That means that you can do 3% down as a second-time home buyer, but you have to be under this income limit to qualify at HomeReady and Home Possible.
So again, 5% down for all others. And if you're in, what's called a high-balance area. Now, you can check Conforming Loan Limit Map. This is given by FHFA. This is basically showing all of the areas that are what are called high-balance. So conventional loans have a loan limit, but you can go above the loan limit. Unfortunately, mortgage guidelines can be a little confusing, so that's why we're here talking about them.
So in the map that are highlighted in yellow and orange are high balance areas and all throughout the one colored gray, you can do 3% down. Everything that's colored in yellow and orange needs 5% down as a minimum.
If you're buying a secondary home, 10% down. If you're buying investment, it's 15% down. Some lenders have overlays that brings up to 20% down. If you have multiple units, you're looking at two to four unit home that down payment will increase. So for instance, on a four unit home that is going to be an investment property. You're going to need to put 25% down. However, it fits a single unit home. That's an investment property. You can do 15%.
For 20% down, this is where this myth comes from. When you put 20% down on a home, whether it's a primary residence, secondary or investment, you can remove Private Mortgage Insurance.
PMI or Private Mortgage Insurance is a fee that you pay to the lender. It protects their interest in the home. If you ever stop paying it's insurance for them, but you have to pay the cost of that. So this is just a quick illustration of if you had 3%. Which would be the equity that you have in home versus the loan balance.
Keep in mind, you're going to always put more down than the minimum. If you want to, the more money you put down, the more you're going to save by reducing interest. It's also going to lower your monthly payment.
Now, a quick aside. You can see this gets complex as you look through loans, and it's really helpful to begin looking at building a team that's going to help you through this process. And so if you're looking for an introduction to a helpful loan officer or helpful real estate agent, I can help you out.
If you would like to get connected with a helpful expert in your area, you can go to WTHYL - Lender to be introduced to a helpful loan officer, or WTHYL - Agent to be introduced to a helpful real estate agent.
So conventional loans have two options that are called affordable options in these are HomeReady and Home Possible.
Basically there's a two programs offered by Fannie Mae and Freddie Mac, and they do have an income limit, but often what they do is they tend to have a lower rate and lower private mortgage insurance. So Fannie Mae and Freddie Mac have said, these are for credit worthy, low income borrowers.
This does allow 3% down, even if you're not a first time home buyer, it does have a lower rates.
It does have lower Private Mortgage Insurance than a standard conventional loan can. We don't have to be a first-time home buyer.
The income limit is 80% of the AMI or Area Median Income. Basically you can zoom into your area. For example, let's say that we were buying in Kettering, OH, we click on it. Then it's going to show us the Area Median income. You will see the HomeReady income limit, 80% of the Area Median Income.
So if you make more than this, and that's the people who are going to be on the loan. If the people on the loan make more than this, then you will not qualify for a HomeReady or Home Possible loan. So it's something to check out. If you do, if you are under that income limit, then this might be a really good option for you.
Now something interesting here is that if you take one, if you use one of these programs, HomeReady and Home Possible, and often if you put less than 5% down with a lot of lenders, you will have to take a easy, but annoying course. It's like a home ownership course could be really helpful in understanding a lot of the process.
These are gonna be the same as other loans. Conventional, does it have any like specific closing costs that are specific to get like an FHA loan has upfront mortgage insurance that's it goes along with the same thing with USDA and VA loans.
Conventional loans don't have any sort of specific fee with them. You do have the option to waive escrows at 20% down, escrows are basically a savings account for your taxes and insurance that are paid for upfront.
Since things like taxes and insurance are usually paid semi-annually or annually, it's a savings account that you create when you close on a home. So there's money in there when the six month bill or the annual bill comes due. You can waive this at 20% down. Some lenders will actually allow you to waive this at something like 5% down some may or may not require or charge a fee with waiving escrows. Talk to your loan officer about some options there.
Now, your money for your down payment closing costs. Do you need to be verified with bank statements? Usually this is two months of bank statements. Also, you can use things like a gift fund from a family member or a 401k loan to prove that you have money for the down payment.
Basically, your lender just wants to see if it's going to cost you $40,000 to buy a home or $20,000 or whatever. It's going to cost a bottom line to buy the home with your down payment closing costs. They want to see where you got that money from.
All right, so let's talk about credit score minimums. So 620 is the absolute minimum on a conventional loan. At 680 is where we tend to get better rates and 740 is the top of the charts. You're not going to get any better benefit by having an 800 versus a 740, the chart just tops out. You did a good job. You can't do any better than that.
So what I recommend to people is if you are above 620, let's at least look at a conventional loan option. For most people, in between 620 and 680, something like FHA or a non-conventional loan might be a better option.
Because conventional loans tend to penalize middle of the road, credit scores, conventional loans tend to really like the credit scores that are 700 and above, and anything less than that, we start to see some extra rate increases added to them. If you're above a 620, it's definitely worth seeing if you can qualify for conventional and getting a quote for a rate. But absolutely we want to compare that against something like an FHA loan. And I have a tool that helps you compare loans called LoanClarity Advisor that can help you with that as well.
Of course, if you're in the seven hundreds, conventional is almost always the best option for you unless you're looking at a specific type of program a VA loan program that allows 0% down. If you are a veteran.
So let's say we had these three scores. We have a 780, 716 and a 733. What lenders are going to do is they're going to look at your median score. So the middle score, we're going to throw out the lowest throughout the highest and use the 733 as your credit score. So that score in the middle.
If two people are applying on a loan, what they're going to do is actually average the median scores. They'll take your two median scores, average them together, and if that's above the threshold what it will then do is allow you to be eligible for that loan.
It's not going to be the credit score used for your interest rate and how they find the interest rates are going to be used to see if you're above the 620 minimum. Then what they're going to do is take the lowest of your median scores. That's going to be the score that's used to find your interest rate.
Your credit score in conventional loans heavily drives the interest rate that you get, the higher, the credit score you have the lower, the interest rate, the lower credit score. You have the higher, the interest rate and private mortgage insurance as well.
Two year history of credit is going to be the best.
Rental history can now help on Fannie Mae loans. You do have to use a certain software basically analyzes your bank statements. So your loan officer can help you get connected with that if you'd like to. It can only help, it can't hurt if you refuse it. So if you say, I actually don't want to do that, it will in no way negatively impact your your loan application, but if you're on the edge, it can help you qualify. If you initially, weren't going to be able to get an approval from the underwriting software.
Conventional loans do you have the option if you have no credit score at all to use what's called Manual Underwriting, and this is where they can look at things like utility statements and bills to build a kind of a pseudo credit score.
Now, no credit is completely different than bad credit. Bad credit will not work on a conventional loan, but if you have no credit score, then a manual underwrite can work.
So here are credit events. These are basically big things that take a hit to our credit score. What and how much distance do we need between the time of the event and the time that we can close on a conventional loan.
If you had a deed in lieu or a short sale you're going to need to wait four years from the transfer of the deed to the time that you close on a conventional loan. If you had a foreclosure, it's going to be seven years. A Chapter Seven bankruptcy is four years waiting period. For Chapter 13, four years after dismissal, two years after a discharge and IRS liens, you need to have a payment plan for those and that payment plan needs to be included in the debt-to-income ratio. This is going to change your affordability with how much you can qualify for what kind of loan you can get. And ultimately how large of a house can you purchase with the conventional loan.
So let's take a look at interest rates really quickly for conventional loans. So you can go to WTHYL - Rates. We can look at rate trends and you can also to turn off all of other loans to avoid confusion. Right now, the rate is in a 15 year versus a 30 year 5.4 versus a 4.5 for these loans here.
There's been a change to conventional loans where high balance loans, like we talked about the require the 5% down. Now we're actually going to be more expensive along with second homes. So these are the differences in the fee costs.
So the actual closing costs of these loans think of it like a point charge. It's like prepaid interest. Fannie Mae and Freddie Mac had made buying a high balance home and a second home, more expensive to try to reduce some of the competition in home buying and it's unclear how well that's working so far. But just be aware if you're buying a home in a high-balance area or a secondary home, the interest rate is going to be significantly higher than if you buy a primary residence home.
Also, 3% down usually has a higher interest rate than 5% down. If you have the flexibility with your down payment, if you're looking at Hey, we wanna we wanna do something like 20% down. Ask the loan officer, can you give me a quote for 3%, 5%, 10%, 15 and 20. Then see what the difference in interest rate looks like.
Now, conventional loans usually have a higher interest rate than government loans like FHA, VA and USDA.
The mortgage insurance is lower on conventional loans most of the time, and usually it's a better option and we're going to walk through a cost example so you can see what the difference looks like. Because sometimes the lowest rate isn't the best option.
Also something to be aware of, especially as our interest rate environment is changing. We were looking at like historically low interest rates that we hadn't seen before now. Interest rates are in the five-ish, low five to mid 5% range.
Adjustable Rate Mortgages or ARMs are becoming slightly more interesting. This is where instead of a fixed rate loan where your interest rate is fixed over 30 years, an adjustable rate loan only has a short fixed period, and then it can adjust every year or most of the time, every year after that.
So maybe in the first five years, it's 5% and every year after that, it can change. So that's something to be aware of and maybe talk to your loan officer about some options.
So now let's talk about mortgage insurance. There's no upfront mortgage insurance like there is with some government loans.
Private mortgage insurance is required. If you put less than 20% down, here's something that a lot of people mess up. They think that as soon as they have 20% equity in the home, so let's say that you put 5% down and over the next eight years, you're paying in principal to your mortgage and you get to 20% equity.
It doesn't immediately fall off at 20%. You have to actually request it to come off, and sometimes the lender requires an appraisal to verify that the value of your home didn't decrease at 22%, it automatically falls off. So just be aware of that at 20%, you can ask for it to come off at 22% and automatically falls off.
Now conventional loans are often commonly use the refinanced into, to remove a mortgage insurance from something like an FHA loan. FHA has a really high mortgage insurance monthly that can cost several hundred dollars per month. So it, a lot of people will do is maybe they can only qualify for an FHA loan in the beginning, but then they refinance into conventional loan to lower the mortgage insurance..
Conventional loans are also interesting and that the PMI is based on the risk of the loan. So the higher your credit score is the lower the mortgage insurances, because it's less risky of a loan. The lower your credit score is the higher your mortgage insurance is going to be. And there's a lot of other factors that impact your PMI rate as well.
So quick example, let's say we're looking at a $400,000 home with $380,000 loan. PMI ranges all over the place. It's look, think of it in the same way that you would shop for lenders. There's all different types of PMI. There's no one standard thing. However, it's usually between 0.5% and 1% of the loan amount.
So 0.5% would be $158 per month, 1% would be 316 per month. I like to use is just an average for most people have 0.6%, which would be 190 per month on a $380,000 loan. Again, this can change often. It's a lot lower, but I think this is a really good rough estimate for just adding some extra padding to make sure that we're comfortable with the payment.
So if you are going to be living in the home. You're going to be moving into the home, living in there, you need to move in within 60 days, the minimum occupancy before you choose to rent it out as a one year.
So the way that this works is if you're saying I want to buy the home as a primary residence, and then I want to move out, rent it and buy another home. The minimum time that you have to live in there is one year. As long as you do that, you don't have to refinance it into an investment loan. If you buy it six months from now, you want to rent it out, you have to refinance it into an investment loan. There's always comments are like, yeah, but how are they going to know? I'm not going to tell you how to commit occupancy fraud, please don't do it. I don't suggest it.
There's plenty of software that can understand when people are doing this. So just be aware, they do check.
Minimum occupancy time to sell though is none that you can sell it anytime. So if you move into the home and then a month from now, you want to sell it. Absolutely. You can do that. No problem at all.
Secondary home, you can use something like an Airbnb. You can choose to live in there for a period of the year and then rent it out the rest of the time.
Also, you can use it as an investment property where it's just rented and you can also buy homes that are two to four units.
The appraisal is where the lender needs to justify the value of the home. That way when you ask the lender, Hey, can you give me $400,000 for the home? They're like, yeah, it's actually worth $400,000. They don't want to give you $400,000, and the home is only worth 200,000.
So a conventional loans are easiest to get as is so it's best for foreclosures. Basically what this means is conventional tend to be the most lenient of the main types of loans in allowing things to be in somewhat of a state of disrepair. Whereas like FHA loans can be really strict about the requirements. Fannie Mae is a little bit more lax.
So if you got a appraisal with lender, a and then all of a sudden you wanted to switch to lender B you can transfer that from lender to lender B as long as lender B is okay with that. So conventional loans, Fannie Mae and Freddie Mac don't have an issue with that, but your lender may or may not allow that would be an overlay. You just want to check with them.
Fannie Mae is slightly more lenient in their appraisal standards. Also, it's important to understand here is that it permits the appraisal to be based on the as is condition of the property provided existing conditions are minor and do not affect the safety soundness or structural integrity of the property.
And I'm going to walk through what is, what are some of those issues right here. But really quickly, what's really interesting about conventional loans is they allowed desktop, appraisals and waivers. So normally an appraisal is we're an appraiser is going to come out to a house and they're going to actually walk through the outside and the inside.
And then as COVID hit, there's a lot of changes to appraisals where lenders were allowing more desktop appraisals. This is where a lender may or may not just look at the outside of the home, they do actually do a video walkthrough of the inside of the home. And often what they'll do is they'll use computer models and software to figure out and justify the value of the home just based on data. Some people love this. Some people hate this. I'm just telling you what exists.
Usually, this is only available if you're buying a home with one unit and often with 10% down, now there have been some COVID loosening of standards that have allowed people to get desktop appraisals, even without having the 10% down.
You can also get an appraisal waiver and this would be where an appraisal isn't needed at all. So basically the underwriting software says, Hey, we actually have enough data to support the value of this home. So you want to buy it at $400,000. We have enough data to support that we don't actually need any appraisal.
Fannie Mae calls us an Appraisal Waiver and Freddie Mac calls it Automated Collateral Evaluation. Usually this is only available for primary one unit, 20% down in a really high credit score expect somewhere in the 720 and higher range.
So here's some appraisal issues that conventional loans do not like one is active roof leeks, water seepage or significant plumbing leaks, uncapped wiring, curled cupped, or missing roof shingles, damaged or failing foundations, mechanical system, where it's apparent it has expected life or mechanical systems that are non-functional and sanitary system with evidence of failure.
So if these are issues, likely it's going to be flagged in a conventional appraisal. Meaning, likely it needs to be fixed before you can close on that loan.
Now let's run through some example homes. I think this is really helpful just to see a general idea of monthly payments, potential upfront costs. Just keep in mind, this is all information based on public data at the time of recording. And these are all just based on averages. Things like interest rates and closing costs are just averages. These are not quotes available directly to you from me.
So this is a home here that I found online listed in Columbus, which is like an hour away from me for $465,000.
This is a two bed, three bath. It's a really nice updated home. We can get this for 3% down, which is going to be $13,950. Estimated closing costs, probably going to be somewhere around $9,300. Here's a breakdown of the monthly payment. So we have principal and interest for $2,241, the mortgage insurance and PMI or Private Mortgage Insurance is $226, the taxes for $802, homeowners insurance is $172, homeowners association fees at $228, and the monthly payment if we did 3% down would be $3,850 per month.
Let's look at an example too. This is a home in Dayton. This is the city I live in $209,900, four bedroom, two bath. Brilliant, nice home. Nothing too crazy, right? It's not this massive mansion. Nothing too crazy, right? It's not this massive mansion.
It's 3% down $6,297. Estimated closing costs would put you somewhere around a $4,200. Their principal interest would be around a thousand dollars per month. Private Mortgage Insurance or PMI, a hundred dollars per month. Taxes, $380. Insurance $78 and HOA zero, this would put you about $1,653 per month for this home here in Dayton. And then you can get to live close to me, maybe that's a win. Maybe that's a lost in your book. I don't know.
So loan limits in 2021, the loan limit was $545,250. We've had an 18% increase to this year of 647, 200. This is the maximum loan that you can get. And the most of that when we looked at that map, that was that gray area.
If you check the Conforming Loan Limit Map, if you're buying in somewhere like Davidson County, TN, then it becomes $694,600 as a loan limit. If you're looking at buying somewhere in Santa Clara County, California. The loan limit is $970,800. So that does change depending on where you're at. The maximum price with 3% down, not in those high cost areas, went from 565,000 to $667,216 with 3% down.
Of course, if you bought more as a down payment that will increase the maximum purchase price that you can have. Remember 3% down, 5% down in high cost areas.
Now for income and employment, you need two years stable history. This does not have to be at one specific job. This is just a two year history, not at one specific place. It's ideal to be in the similar field. If you are changing jobs.
And retirement does count as employment on a loan application. I know that sometimes trips people up but if you're retired, it's perfectly fine. You can still get a loan based on things like your pension income, or maybe you have a side job or social security or whatever income you're getting distributions.
Frequent changes in the same line of work are okay as well. So think things like temp jobs, even if you have a history of doing temp jobs over the past two years, That actually still works as long as you have consistent income.
This is all determined by a formula called the Debt-to-Income ratio. This is the debt that you have divided by your gross monthly income. Yes, lenders use gross monthly income. I know that's not what hits your bank account. That is what they use though. Every single lender in the US uses your gross monthly income.
Some loans have what's called a Front-End ratio, conventional loans don't have it. So we're not going to worry about talking about it. We're going to scratch this out.
They have what's called a back-end debt-to income ratio. So this is your total debt divided by your monthly gross income.
So your total debt is going to be everything that is a minimum debt payment. So think of things like credit cards, car loans, student loans, personal loans, child support, and alimony do count.
Things that do not count as debt are things like your rent your gas, your groceries your utility bills. Those are not debts. Those are expenses. Were only gonna count out debts.
Now this goes up to 49.99%. Meaning that if you make household income of a hundred thousand dollars per year, we divide that by 12 that's, $8,333 per month times 0.499. We can have a maximum amount of debt. Plus a future household payment. Those added together can not go above $4,165 per month.
So not everybody can get approved this time. All right, please keep this in mind. This is just the maximum that we've seen. Remember the software is going to give the ultimate approval here. So the lower your credit score is the lower that income maximum is going to be for you.
Fannie Mae, Freddie Mac do not publish these exact numbers and they actually can change week to week very slightly. So that's not going to be published. These are just the maximums that we see. So keep that in mind. So if you go to a loan officer and no, the Kyle said it was 49.9%. That's just the maximum. That's usually only offered to the least risk, least risky buyers. The most well-qualified buyers.
If you're in a situation where you have a lower credit score or less money or less down payment then you're usually likely not going to. A debt-to-income ratio. That's that high community property is not a factor in other loans. Sometimes your spouses debts have to be included with conventional loans, they do not.
So let's run through some examples. If we have $50,000 per year income, and this can be either you as an individual or household. However many people are on the loan, if you have zero debt, the maximum housing payment would be $2,082. This is the absolute maximum. We're assuming we're having, we have a super good credit score here.
If we have $750 per month in debt, it's $1332. If you have a hundred thousand dollars income again, that can be household income. Zero debt, 4,165 is the maximum housing payment. And this has to be your principal, interest taxes, homeowners insurance, all combined. It can not exceed that number. If you have $750 per month and minimum debt payments, then that's going to drop to $3,415 per month.
Now one quick thing is I do have a calculator here that I call the Max Purchase Price Calculator. What this is going to do is help you with some of the debts, income math. And so instead of having to figure that out on your own it's going to walk you through all of that. So you can come in and put in maybe 3% down interest rates are looking a little bit higher here, fill out things like your yearly, gross income, how much debt you pay and maybe a co-borrower on the loan and show you how much you likely would be approved for based on what you entered. And you can play around with this and see different risk levels along with this tool.
These can trip up a lot of people with getting a mortgage because it's a lot of debt and a huge monthly payment that can impact your affordability. So this is where we see some big differences between Fannie Mae and Freddie Mac.
In Fannie Mae, you can talk to your loan officer about, Hey, what's GSE or Government Sponsored Enterprise are we going to use? Fannie Mae or Freddie Mac? And they can also help strategize which one you're going to use depending on, which is going to be easiest for you to qualify with.
So Fannie Mae is going to either look at the minimum payment that you pay on your student loans. Or if they're deferred, they're going to use a 1% of the balance as your monthly payment and include that in your debt-to-income ratio. We talked about that 750 per month and a minimum debt payments. That's going to be added into whatever your minimum debt payments are.
If you're on income driven repayment, it is allowed. This is a really big one because if you're on an IDR payment at $0 per month, Fannie Mae is going to be great for you.
With Freddie Mac, they're going to look at the minimum, or 0.5% if it's zero or deferred. So with Freddie Mac, if you have a $0 per month IDR, they're actually going to default to 0.5% of the balance as your monthly payment here.
So if you're on an income driven, let's say your normal student payment is going to be a $200 per month. And that's on I on IDR, let's say that's down to $50 per month.
It's allowed them both Fannie Mae and Freddie Mac. If it goes down to zero, that's only going to be allowed on. Okay. So for instance let's see, we have a $45,000 student loan on income-based repayment at $0 per month. Fannie Mae is going to accept $0 per month. Freddie Mac is going to take 0.5% of the balance as your monthly payment. That means your affordability, how much home you can afford is going to be reduced by $225 per month.
All loans allow you to ask the seller for a percentage of the purchase price back as a closing cost credit. This can help offset some of the upfront costs with conventional loans that this is actually dependent on how much money you put down. If you have a less than a 10% down payment, the maximum you can ask for is 3% of the purchase price. So for a $200,000 home, that's $6,000 that you can ask back something to keep in mind is that the more seller credits you ask for the less competitive offer, because. If you have 10% down 6% is the maximum you can ask for 25% down or higher 9% and on investment properties, the maximum is 2%.
So for an example, if we're looking at $425,000 house with 5% down, the maximum credit we can ask for is $12,750 towards our closing costs, which is 3%. Again, keep in mind this. Doesn't want to pay most of the time, the extra $12,000. If another offer comes in that isn't requesting seller concessions. So you want to talk with your realtor about how this is going to impact her offer. If you ask for seller concessions in your offer.
So the special requirements features here that are just a little bit more unique to conventional loans is number one, they're easier for foreclosed homes. They allow things like desktop appraisals. They can allow appraisal waivers. One really interesting thing here is you can get a second appraisal if you need to.
So for instance, if you let's see, you put an offer in on a home and I came in short, so maybe you're putting in an offer for $400,000 and you got an appraisal with the lender A and it came in at 380 and you really don't want to have to bring an extra $20,000 to the closing table and the seller won't budge. You can actually go to another lender, let's say lender B and have them do a second appraisal.
Now, it doesn't mean that's going to come in at the value that you want to, it may come in even lower, but it is an option that you have on conventional loans that you don't have with other types of loans.
There are also are rehab loans. So things like a homestyle renovation loan is an option. You want to work with the lender who specializes in Conventional Rehab loans, if you are going to do something like that.
Now for some refinancing options with conventional loans. So just something to keep in mind, as you get a loan, you may want to refinance into something like a lower rate in the future, or you may want to pull cash out of your home of the equity that you have, maybe have a $50,000 in equity that you want to pull some of that out to help pay off debt or go towards maybe a college fund or something like that.
So for conventional loans, there are no streamlined options. Other loans have the option to refinance into a lower rate without having to look at a new appraisal or look at your income or your credit. And fortunately, there's no option like that with conventional loans. You have to have a new appraisal, new income, and new credit underwriting. So we have to go through the whole underwriting process again.
There are two different refinance options. There's limited cash-out refinance, which used to be called a rate and term refinance. This is where most people will adjust. Like it's called the rate and term. I don't know why it's done that. They changed the name cause rate and the term made sense. Cause that's what you were changing. This would be like if you were in a 6% interest rate and all this. Interest rates dropped to 3%, which they did a year or two years ago. This is where you could do a refinance to get a lower interest rate and save a lot of money on interest.
A cash-out refinance is where you actually pull money out. So you can actually refinance and get a lower interest rate. If the interest rates in the market are lower and pull money out of your home, that you have built up in equity.
So let's talk about the success rate and the seller perception. When most people are talking about loans, they're talking about conventional loans, they're seen as the standard option. The more traditional option with getting a loan and which sometimes can be preferable to cash. If the offer price is higher. Now, this is going to depend on the local market that you are in.
But sometimes what can happen is when people put in cash offers for a home, let's say a home is listed at $400,000. Sometimes people with cash, we'll put in an offer for 390. Now we're in a really unique real estate market right now where that's not really the case, but historically that often is the case where cash offers can come in at a lower discount because cash is a lot easier and sometimes more attractive to sellers.
Would often happen is a cash offer may come in at 390, but a conventional offer may come in at 400 and the seller may choose to go with a conventional loan because it's offering more, even though cash is a little bit quicker. So again, not always the case, we're in a very unique real estate market right now. And that likely might not be the case for you at the moment.
So one really interesting thing to keep in mind here is that, especially as we're in this kind of really. The real estate market is if right now you can't qualify conventional, please talk to your loan officer and say, Hey, what do I need to do in the next three months, six months, one year, whatever it's going to take, what do I need to do to qualify for conventional?
Because in a market like this, putting in an offer with something like FHA, USDA, and VA can struggle to compare to the other offers that are coming in that are likely conventional is going to be your best bet, putting your best foot forward to be able to get your offer accepted. So please ask your loan officer what you can do. Don't just get a no, and then move on without seeing what else you can do.
I build this calculator called the LoanClarity Advisor, and what this does is allows you to compare different loan options side-by-side. So we can look at loan scenarios, but then we can also look at comparing loan quotes side-by-side from different lenders, so you can choose the ones that can save you the most money.
One quick example I wanted to run through here was let's look at a $400,000 home, and if we look at conventional 3% down versus 3.5%, that's a minimum on FHA. Both of 30 years.
Now, here's where the lower interest rate isn't always better because on a conventional loan, let's say we get a 5% interest rate. Now FHA loans often have a lower interest rate, but they have a lot higher mortgage insurance. So 4.625, let's use an estimate. So this is going to use that 0.6 number that we talked about earlier. So 194 per month in Private Mortgage Insurance, the FHA mortgage insurance is automatically calculated. So it doesn't have an input in the computation.
If we looked at this over six years, even though the conventional loan had a higher interest rate, choosing this loan saves us $4,000. It's $4,000 cheaper over six years. If we look at 10, it's $2,000 cheaper They actually almost get close as the FHA low-interest-rate starts catching up, but then all of a sudden things change. It starts diverting that conventional loan gets lower in costs, and that's because the mortgage insurance drops off at that 22% equity.
If we look over 30 years, $17,000 cheaper. If we look at the monthly payment, here is our mortgage insurance, right? If we look at this through the years at the beginning, 194 versus 271, because FHA has a higher mortgage insurance, but a lower interest rate.
And if we keep an eye on the conventional mortgage insurance, that's actually going to go to zero. It looks at the end of year nine is when that falls off and we hit that equity mark.
Ultimately, almost any lender can offer a conventional loan. Apply. Ask the loan officer what you need to do to qualify for conventional if you don't qualify upfront. In this market, you would likely want to work with a lender who can help you get as fast of closing as possible.
Conventional loans often can close in between 15 to 30 days. Just talk with your loan officer about what to expect here. That's going to help shape your offer.