Chapter 04: What Credit Score Is Needed to Buy a House?

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Buying a house is undoubtedly one of the most exciting milestones! But, previous homeowners know and future homeowners soon find out that there’s a ton that goes into the process. 

Before even beginning your dream home search, it’s important to have a firm understanding of the state of your financial health. 

For those who plan on taking out a loan, it’s especially important to know what your credit score looks like to determine if you can qualify for a loan and how to get the lowest mortgage rate. Aside from debt, income, and savings, lenders look to your credit score as the main determinant for low rates.

This is Chapter 4 of our home buying series, where we’ll be discussing the basics of what a credit score is and what credit score is needed to buy a house

In the previous chapters, we went over how to save for a house and resources to use as a first time home buyer, both of which are important to know before you embark on your home buying journey. But you also need to understand your credit score, as that plays a big role in your eligibility to get a loan.

If you’re already confused, fear not. We’ll explain! Before we dive into answering the important question of “What is a good credit score to buy a house?”, let’s back up and take a look at the basics so you feel ready to make an offer on the house of your dreams. Read on to learn what credit score is needed to buy a house or use the links below to skip to any section in the article. 

What Credit Score Is Needed to Buy a House?

illustration of credit report

The credit score needed to buy a house varies.

If you’re not planning on putting any money down or paying cash upfront, then you’ll be taking out a pretty substantial loan for your new home. To determine if you qualify for a loan, consider using a free credit score check, as credit score is one of the most important factors that lenders look at when determining mortgage lending decisions. In fact, just a small difference in credit scores could mean tens of thousands of dollars more over the term of your loan.

Checking your credit score often is important so that you can have a better understanding of your current credit position. It also can help you be more aware of what lenders will see and if you need to increase your credit score. You need to have a certain credit score for a mortgage because your credit score essentially tells a lender how likely you are to repay a loan

There are many effects of bad credit, one of which being that your loan applications might not be approved. Your credit score can also impact whether or not you can get pre-approved or pre-qualified for a loan, both of which are important when buying a home. The difference between pre-qualified vs. pre-approved is basically that pre-qualifying gives you a loan amount estimate, and pre-approval is an assessment of your financial situation and can be used to negotiate an offer.

Still confused? Let’s back up even more.

What Is a Home Mortgage Loan?

A home mortgage loan is used to finance the purchase of a house or real estate. It makes homeownership more accessible since the entirety of the house doesn’t have to be paid upfront. Home mortgage loans are typically the largest loans you’ll ever take out, but also typically have lower interest rates than other types of loans. 

Because they’re such large amounts, they have multiple moving parts and can typically last anywhere from 10 to 30 years. These loans are paid back in monthly payments with interest, a principal, and many other costs like property taxes, hazard insurance, or private mortgage insurance (PMI).

Home loans usually include:

Because these loans have much longer terms, it’s important to keep in mind how much debt you want to take on when applying. Weigh your current situation with your future plans to assess if taking out a substantial loan is feasible for your situation.

What Is the Minimum Credit Score Required for a Mortgage Loan?

You may be wondering: “What is the lowest credit score to buy a house?”, but the answer varies depending on the type of loan you choose.

Many first time home buyers are worried they won’t qualify for a loan, but that’s certainly not the case. Federal Housing Administration (FHA) loans have rather low requirements. Borrowers should have at least a credit score of 500 with a 10 percent down payment. However, this doesn’t guarantee the lender will accept. Many lenders are more prone to approve a credit score in the 500 to 600 range, so 600 might be a more realistic minimum. If your credit score falls below the 600 mark, consider attempting to raise your credit score before applying for a loan. 

The credit score you start with will most likely not be the deciding factor of whether or not you qualify for a loan, so if your score isn’t where you want it to be, don’t panic. 

There are many ways you can raise your credit score quickly. The average credit score in the U.S. is 716 for the FICO score, so it’s helpful to see how yours compares. You may also have different credit scores that are based on the various credit score models, but knowing what your scores are can help you have a better idea of your financial health.

What Interest Rate Can I Get With My Credit Score?

Let’s say you get approved with a credit score on the lower end of the spectrum. Still, this doesn’t guarantee you’ll receive the deal you’re hoping for. Credit scores greatly affect the amount of interest you’ll pay

A higher credit score often allows you to get a lower interest rate on your mortgage and this could save you a lot of money in the long-term. 

Quick Tips for Improving Your Credit Score

If you’re not happy with your current credit score and wish to improve it before setting out to buy a home, there are a few options you can consider. Just remember, fixing your credit score takes time and commitment. With that being said, here are some methods for boosting your credit score:

  • Make your credit card payments. It’s important to pay off your credit card bill on time each month. Setting up payment reminders or automatic payments can help keep you on track here.
  • Reduce your debt. Strive to pay down existing debts if you can. Many lenders look for a debt-to-income ratio to be below the 30 percent mark, meaning you’re not spending more than a third of your income servicing debt each month. Paying off loans will lower your debt-to-income ratio, which can make you a more desirable candidate to lenders. It’s also crucial that you know your debt-to-credit ratio, which is the amount of debt you owe compared to your available credit. A low debt-to-credit ratio can help boost your credit score and show lenders that you are trustworthy when  it comes to repayment.
  • Review your credit report. Look this over diligently. Sometimes people find inaccurate information or missing information on their credit report. If possible, dispute any misinformation on your report.

Build Credit to Buy the House You Want

Once you’ve set out on the journey of purchasing a home, it’s important to get organized and collect all the information you can to assess your financial health first.  Mint offers a free credit score check that will help you determine where you stand in front of lenders. If your credit score isn’t where it needs to be, you may want to take a step back and consider making a plan to improve the number before applying for a home mortgage. You can also use the app to set savings goals, manage your budget, and keep your financial health in check at a glance.

So now that we’ve answered the question of “What credit score do you need to buy a house?” you should feel a little bit more prepared with your home buying journey. To learn more about first time home buying resources and the steps to buy a house, continue reading the series. The next chapter in the series, Chapter 5, will cover what proof of income is.

Sources: FICO

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Millennials Want a Different Kind of Retirement

Over the last decade Millennials have gotten a lot of attention (good and bad) for their “slacktivism,” job hopping, mountains of student debt and FOMO culture. But Millennials are growing up, and many of them are prioritizing financial independence and thinking seriously about their path to retirement. Perhaps unsurprisingly, and in contrast to the generations before them, they have different ideas about what that path and the ultimate destination will look like.

According to a new Schwab study, Millennials are more likely to prioritize travel over homeownership in retirement. They want the freedom to use their savings to pursue their desired lifestyle and passions more than chase financial stability. They want flexibility and new experiences more than traditional retirement pursuits.

The Millennial Road to Retirement

As for the path to reach these non-traditional goals, Millennials are looking for flexibility on that front too. They are less focused on a specific retirement savings amount. Instead, they see the accumulation process as more of a continuum, and they want to pursue their passions along the way toward retirement – not just in retirement. Additionally, they are less interested in preserving their wealth in retirement and will not spend as much time managing their investments as Boomers.

Some of these Millennial preferences may seem out of line with responsible retirement goals, but this is a generation of action. Millennials, to their credit, are already starting to save much earlier than their predecessors and over the course of the pandemic, many have stepped up their engagement and focus on financial planning.

It’s also worth noting that Millennials aren’t simply re-writing the script for retirement because they can. Major economic and societal shifts are driving these changes in how younger people approach money, careers and life. They have encountered challenges that are different from the generations before them. The cost of homeownership has risen, pensions plans have dwindled, student debt has risen dramatically – just to name a few. 

Tips to Help Millennials on Their Path

The road to retirement has only gotten more challenging over the course of Millennials’ lifetimes. The good news is that many timeless financial planning strategies can be readily adapted to fit their needs.

Here are the top tips I share with Millennials for reaching the retirement of their dreams:

  • Stash some cash: The first step to planning for the rest of one’s financial future is creating a financial cushion to fall back on in preparation for the inevitable disruptions life will bring. A few months’ worth of savings is a good place to start an emergency fund.
  • Focus on your financial state, not your retirement date: Don’t think of retirement as an arbitrary date when a switch is flipped and retirement begins. Instead, target a financial state that would provide for the flexibility to make work optional. That could look like saving enough by the time you are 60 to be able to stop working if you needed to, but with the idea that you will continue working and saving until you are emotionally ready to retire. It is important to crunch the numbers to figure out how much will be needed to feel comfortable. From there, adjust your savings accordingly to grow that nest egg.
  • Grow it and protect it: We all want to grow our savings and investments to sustain us through our lifetimes. But don’t lose sight of protecting what’s already in place. There’s no such thing as a “sure thing,” and that means that diversification is important to potential growth along with stability. Don’t risk more than you can afford and be ready to re-evaluate your risk tolerance over the course of your investing journey.
  • Don’t be derailed by FOMO: Hot new investment trends can be very enticing, but getting caught up in the rush toward shiny possibilities can lead to setbacks that limit future potential. Remember that investing is about helping grow money over time to reach your goals and not speculating or chasing fads.
  • Think long and short: Retirement planning is a long process that requires time and patience. It also requires flexibility to adapt to changing circumstances. No one can predict all the challenges that lie ahead, or if their future self might look at things a bit differently than their present self. Create a plan and revisit it at least once a year, knowing that there will be changes along the way.

The Bottom Line

Just like Boomers and Gen X’ers, Millennials have distinct generational characteristics that set them apart, but at the same time they are not a monolith. Millennials will take many different approaches and paths to retirement. Their personal lives will take unexpected twists and turns that may change some of their goals along the way.

Sound financial planning that begins early is the key to success no matter the desired destination. That much never changes.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets. Investing involves risk, including loss of principal.


Schwab Intelligent Portfolios Specialist, Charles Schwab

Amy Richardson is a CERTIFIED FINANCIAL PLANNER™ professional and Schwab Intelligent Portfolios Specialist. Amy focuses on providing internal teams, clients and prospects with education, updates and information about Schwab’s investment offerings and philosophy, including Schwab Intelligent Portfolios (Schwab’s automated investing service) and Schwab Intelligent Portfolios Premium (combining automated investing with a comprehensive financial plan and unlimited guidance from a CFP® professional).


The Impact of Aging in Place on the Housing Market and Younger Generations

The Baby Boomer generation broke records for its size and have dominated American business, culture, and politics since they reached adulthood in the ’70s. Last year, their children and grandchildren, the Millennials, overtook the Boomer generation as their numbers swelled to 73 million. The two “mega-generations” are so large that the combined size of both generations limits opportunities in areas like employment and housing.

Without the savings to retire during and following the Great Recession, many Boomers stayed in their jobs after they turned 65. The combination of a shrinking economy and reduced retirements slowed the careers of millions of Millennials which led to them taking longer to make enough to buy their first homes. Compared to Baby Boomers, only 37% of Millennials between the ages of 25 and 34 own homes.

The strain on America’s real estate markets is so great that even one minor change in Boomers’ homeownership patterns can significantly affect Millennials. Traditionally, after children leave home, their parents “downsize.” They sell the family home, cash in the equity they have accumulated in their homes, and move into a retirement community or buy something much smaller to reduce their living expenses and chores.

Not the Millennials. Seventy-seven percent of people over the age of fifty want to stay in their homes as long as they can. This process of “aging in place” has helped to increase the average tenure to ten years. Despite the increase in equity, median tenure length jumped ten years in September 2018, and by last October, median tenure length reached its highest level in 18 years.

Row of large old brick houses with front porches and gardensRow of large old brick houses with front porches and gardens

“Aging in place” Delays the Inevitable

“The recent dramatic spike in tenure length is reflected in the growing performance gap between market potential and actual existing-home sales, which is up 48% since the end of 2017,” said Marc Fleming, Chief Economist at First American. “Homeowners are staying in their homes longer than ever, limiting supply and slowing home sales.”

Despite the cost of retrofitting a home for seniors, a Freddie Mac study last year estimates that approximately 1.6 million more senior households are staying in their homes than what would have been the case if they “behaved like older generations of homeowners.” 

However, aging in place may be just delaying the inevitable. “More than half of all existing homes are owned by Baby Boomers and the Silent Generation, who will eventually age out of homeownership,” says First American’s Fleming. “When that occurs, the problem may not be a lack of supply, but the exact opposite.”

The oldest Boomers will reach 75 this year and it will take a few more years for the bulk of their homes to be sold. When it does arrive around 2025 and last through the end of the decade, some economists anticipate that over the next twenty years the flood of Boomer homes will reach upwards of 21 million, more than a quarter (27.4%) of the nation’s current owner-occupied housing stock. Over the next 20 years, homes are likely to hit the market as their current owners pass away or vacate their homes.

Not all of these will end up on multiple listing services and real estate sites like right away, if at all. Many Boomer homes will require significant repair and remodeling and rather than pay to get their houses in shape to sell, many Boomer homes will be sold to “cash for homes” companies like HomeVestors or “iBuyers.” Both of these options are attractive because families can sell quickly to settle estates or use the proceeds to pay for long-term care. They also avoid paying brokerage fees. Once they are fixed up, then these homes may eventually end up on MLSs.

Millennials Don’t Want to Live in Boomer Houses

Boomers will face a big problem when they try to sell to Millennials. Their homes are large, expensive, and out of date. Young buyers prefer open living spaces, roomy bathrooms and kitchens with enough space for family gatherings.

A recent analysis of Boomer Zip Codes found that most live in major cities, not necessarily suburbs or retirement hubs. New York City is a serious contender for the title of the most popular place to live for baby-boomers. The urban districts of San Francisco, El Paso, Houston and Chicago make price the primary reason Millennials won’t be buying from Boomers

Many young buyers are saddled with debt and earning just enough to buy a first home in markets like Des Moines, Grand Rapids, Wichita, Omaha, and Toledo. Even in these places, Boomer homes will cost too much.

Sixty-five percent of owners ages 64 to 72 and 56% of those over 73 own homes worth $200,000 or more. Source:

Move-up Buyers Can’t Move Up

As large numbers of mid-to-upper priced Boomer homes come to the market, they will still have a positive effect on real estate inventories. First-time buyers looking for starter homes aren’t the only ones suffering from inventory shortfalls.

The inventory epidemic has become so severe that it is moving up the real estate ladder. Supplies of mid-priced homes are now declining, and their prices are rising. “There are many Gen-X buyers who are still trapped in their first home and that’s because they can’t find the home that they want to trade up. And so, you get this ratchet effect that occurs with the lack of construction, which is not just impacting entry-level, first-time home buyers, but even trade-up buyers,” says Sam Khater, Chief Economist for Freddie Mac.

In normal times, real estate agents counsel their clients to sell their current home before making an offer on a new one to avoid being stuck with two mortgages. In today’s seller’s markets, however, it’s much easier to sell a house in the mid to lower price tiers than to buy one.

In November 2019, for homes priced below $100,000, inventory was down 15% annually. For those priced between $100,000 and $250,000, supplies were 7% lower annually. In December, usually the slowest month to sell a house, properties remained on the market for just 41 days. Forty-three percent of homes sold in December 2019 were on the market for less than a month. In these conditions, move-up buyers will be safer if they buy before they sell.

Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.


Can You Actually Buy an Apartment?

Find out the differences between renting an apartment and buying a condominium or co-op to decide which option is right for you.

Would you like to own your apartment rather than shell out rent on a monthly basis? That’s possible, but only if you own the building in which the apartment is. You can’t buy an apartment, but if real estate ownership is important to you, there are other alternatives to purchasing an apartment building, including a condominium or a co-op.

Each of those three options offers plusses and minuses, and it’s wise to weigh them against one another before deciding where to live next.

What is a condominium?

A condominium, also known as a condo, is a residential living community featuring separate units owned by individual owners. Major similarities between owning a condo and a house include:

  • The right to change the interior décor, including remodeling and updating
  • The responsibility for maintenance and repairs
  • The duty to pay real estate taxes on the property

As for the maintenance and care of shared areas, building amenities and the exterior of the complex, condominium owners pay regular fees to a condo association responsible for those matters.

In a condo, “you own the space within your unit and an undivided percentage interest of the entire complex,” explains Daniel Homick, a Raleigh, NC, real estate and finance specialist with Axiom and an attorney licensed in Ohio. Moreover, condo residents must follow by-laws enacted by the condo association.

Owning a condo is similar to homeownership, overall, but with condo fees and by-laws as two major differences. A third is owners of either also pay taxes on their real property.

You can buy and sell a condominium, and its value can appreciate or depreciate. If condo by-laws permit it, an owner may also rent their condo to a tenant. Doing so, however, does not relieve the condo owner from their duty to pay the mortgage on their property. That’s because renting to another person does not alter or impact the financial obligation incurred by the condo owner when they secured a mortgage.

A co-op has a board you

A co-op has a board you

What is a co-op?

Primarily found in populous metropolitan cities like New York, Chicago and Los Angeles, a co-op does not convey ownership of property directly but rather through a share in the structure. Says Homick, a co-op share offers “the right use the space the co-op occupies. You own the wallpaper but not the walls, the carpet but not the floor. The cooperative owns everything.”

In other words, when a person buys into a co-op, they become a shareholder that grants certain rights. “You’re a shareholder in the cooperative which owns the real estate. As a shareholder in the cooperative, you are entitled to occupy a specific unit represented by the shares,” he says.

Therefore, a co-op shareholder agreement does not convey real estate. Instead, Homick explains, the structure itself belongs to the co-operative. A co-op unit owner is must pay fees assessed by a co-op association for the maintenance of common areas of the structure, just like a condo.

Co-ops also have their own rules and regulations as to what can and can’t do in the living space, says Keith Martin, a Realtor based in Cincinnati, OH.

In addition, some laws apply to condominiums that do not pertain to cooperative ownership. Among them, says Homick, is that “co-ops may prevent the sale of shares to those they disapprove.” While certainly there are state and federal laws prohibiting discrimination in mortgage loan approvals for homes and condos,” cooperative-laws are not as airtight as condo laws” when it comes to that, he says.

Pros of owning a condominium

There are several benefits to owning a condominium. Among them is the right to remodel the living area according to the owner’s taste and needs. Of course, those alterations must abide by the condo’s by-laws.

Other advantages include:

  • No responsibility for outside maintenance, such as grass cutting and snow removal
  • Sharing the financial burden of the maintenance of common areas of the development with the other condo owners
  • Tax benefits of owning real property
  • Owning an asset to distribute to heirs

Benefits of apartment living

When deciding what type of abode is best for you, it’s wise to consider your needs.

If you prefer to pay rent and not be responsible for the physical maintenance of your apartment or its exterior, an apartment is your best option.

Another benefit of renting is flexibility. Whereas an apartment lease is for a specific length of time, usually a year, a condominium or co-op is for much longer typically. That’s because the latter two grant different levels of ownership, whereas renting an abode offers none.

Decisions, decisions, decision

When deciding whether to buy a condo, purchase a co-op title or rent an apartment, you must consider many factors, such as your income, lifestyle and needs so you make the best possible decision for your situation.


Conventional Mortgage Loan – What It Is & Different Types for Your Home

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Additional Resources

The mortgage industry is rife with jargon and acronyms, from LTV to DTI ratios. One term you’ll hear sooner or later is “conventional mortgage loan.”

It sounds boring, but it couldn’t be more important. Unless you’re a veteran, live in a rural area, or have poor credit, there’s a good chance you’ll need to apply for a conventional mortgage loan when buying your next house.

Which means you should know how conventional mortgages differ from other loan types.

What Is a Conventional Mortgage Loan?

A conventional loan is any mortgage loan not issued or guaranteed by the Federal Housing Administration (FHA), Department of Veterans’ Affairs (VA), or U.S. Department of Agriculture (USDA). 

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Most conventional loans are backed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). These government-sponsored enterprises guarantee the loans against default, which lowers the cost for borrowers by lowering the risk for lenders.

As a general rule, stronger borrowers tend to use these private conventional loans rather than FHA loans. The exception concerns well-qualified borrowers who qualify for subsidized VA or USDA loans due to prior military service or rural location.

How a Conventional Mortgage Loan Works

In a typical conventional loan scenario, you call up your local bank or credit union to take out a mortgage. After asking you some basic questions, the loan officer proposes a few different loan programs that fit your credit history, income, loan amount, and other borrowing needs. 

These loan programs come from Fannie Mae or Freddie Mac. Each has specific underwriting requirements.

After choosing a loan option, you provide the lender with a filing cabinet’s worth of documents. Your file gets passed from the loan officer to a loan processor and then on to an underwriter who reviews the file. 

After many additional requests for information and documents, the underwriter signs off on the file and clears it to close. You then spend hours signing a mountain of paperwork at closing. When you’re finished, you own a new home and a massive hand cramp.  

But just because the quasi-governmental entities Fannie Mae and Freddie Mac back the loans doesn’t mean they issue them. Private lenders issue conventional loans, and usually sell them on the secondary market right after the loan closes. So even though you borrowed your loan from Friendly Neighborhood Bank, it immediately transfers to a giant corporation like Wells Fargo or Chase. You pay them for the next 15 to 30 years, not your neighborhood bank. 

Most banks aren’t in the business of holding loans long-term because they don’t have the money to do so. They just want to earn the points and fees they charge for originating loans — then sell them off, rinse, and repeat. 

That’s why lenders all follow the same loan programs from Fannie and Freddie: so they can sell predictable, guaranteed loans on the secondary market. 

Conventional Loan Requirements

Conventional loans come in many loan programs, and each has its own specific requirements.

Still, all loan programs measure those requirements with a handful of the same criteria. You should understand these concepts before shopping around for a mortgage loan. 

Credit Score

Each loan program comes with a minimum credit score. Generally speaking, you need a credit score of at least 620 to qualify for a conventional loan. But even if your score exceeds the loan program minimum, weaker credit scores mean more scrutiny from underwriters and greater odds that they decline your loan. 

Mortgage lenders use the middle of the scores from the three main credit bureaus. The higher your credit score, the more — and better — loan programs you qualify for. That means lower interest rates, fees, down payments, and loan requirements. 

So as you save up a down payment and prepare to take out a mortgage, work on improving your credit rating too.  

Down Payment

If you have excellent credit, you can qualify for a conventional loan with a down payment as low as 3% of the purchase price. If you have weaker credit, or you’re buying a second home or investment property, plan on putting down 20% or more when buying a home.

In lender lingo, bankers talk about loan-to-value ratios (LTV) when describing loans and down payments. That’s the percentage of the property’s value that the lender approves you to borrow.

Each loan program comes with its own maximum LTV. For example, Fannie Mae’s HomeReady program offers up to 97% LTV for qualified borrowers. The remaining 3% comes from your down payment. 

Debt-to-Income Ratio (DTI)

Your income also determines how much you can borrow. 

Lenders allow you to borrow up to a maximum debt-to-income ratio: the percentage of your income that goes toward your mortgage payment and other debts. Specifically, they calculate two different DTI ratios: a front-end ratio and a back-end ratio.

The front-end ratio only features your housing-related costs. These include the principal and interest payment for your mortgage, property taxes, homeowners insurance, and condo- or homeowners association fees if applicable. To calculate the ratio, you take the sum of those housing expenses and divide them over your gross income. Conventional loans typically allow a maximum front-end ratio of 28%. 

Your back-end ratio includes not just your housing costs, but also all your other debt obligations. That includes car payments, student loans, credit card minimum payments, and any other debts you owe each month. Conventional loans typically allow a back-end ratio up to 36%. 

For example, if you earn $5,000 per month before taxes, expect your lender to cap your monthly payment at $1,400, including all housing expenses. Your monthly payment plus all your other debt payments couldn’t exceed $1,800. 

The lender then works backward from that value to determine the maximum loan amount you can borrow, based on the interest rate you qualify for. 

Loan Limits

In 2022, “conforming” loans allow up to $647,200 for single-family homes in most of the U.S. However, Fannie Mae and Freddie Mac allow up to $970,800 in areas with a high cost of living. 

Properties with two to four units come with higher conforming loan limits:

Units Standard Limit Limit in High CoL Areas
1 $647,200 $970,800
2 $828,700 $1,243,050
3 $1,001,650 $1,502,475
4 $1,244,850 $1,867,275

You can still borrow conventional mortgages above those amounts, but they count as “jumbo” loans — more on the distinction between conforming and non-conforming loans shortly.

Private Mortgage Insurance (PMI)

If you borrow more than 80% LTV, you have to pay extra each month for private mortgage insurance (PMI).

Private mortgage insurance covers the lender, not you. It protects them against losses due to you defaulting on your loan. For example, if you default on your payments and the lender forecloses, leaving them with a loss of $50,000, they file a PMI claim and the insurance company pays them to cover most or all of that loss. 

The good news is that you can apply to remove PMI from your monthly payment when you pay down your loan balance below 80% of the value of your home. 

Types of Conventional Loans

While there are many conventional loan programs, there are several broad categories that conventional loans fall into.

Conforming Loan

Conforming loans fit into Fannie Mae or Freddie Mac loan programs, and also fall within their loan limits outlined above.

All conforming loans are conventional loans. But conventional loans also include jumbo loans, which exceed the conforming loan size limits. 

Non-Conforming Loan

Not all conventional loans “conform” to Fannie or Freddie loan programs. The most common type of non-conforming — but still conventional — loan is jumbo loans.

Jumbo loans typically come with stricter requirements, especially for credit scores. They sometimes also charge higher interest rates. But lenders still buy and sell them on the secondary market.

Some banks do issue other types of conventional loans that don’t conform to Fannie or Freddie programs. In most cases, they keep these loans on their own books as portfolio loans, rather than selling them. 

That makes these loans unique to each bank, rather than conforming to a nationwide loan program. For example, the bank might offer its own “renovation-perm” loan for fixer-uppers. This type of loan allows for a draw schedule during an initial renovation period, then switches over to a longer-term “permanent” mortgage.

Fixed-Rate Loan

The name speaks for itself: loans with fixed interest rates are called fixed-rate mortgages.

Rather than fluctuating over time, the interest rate remains constant for the entire life of the loan. That leaves your monthly payments consistent for the whole loan term, not including any changes in property taxes or insurance premiums.

Adjustable-Rate Mortgages (ARMs)

As an alternative to fixed-interest loans, you can instead take out an adjustable-rate mortgage. After a tempting introductory period with a fixed low interest rate, the interest rate adjusts periodically based on some benchmark rate, such as the Fed funds rate.

When your adjustable rate goes up, you become an easy target for lenders to approach you later with offers to refinance your mortgage. When you refinance, you pay a second round of closing fees. Plus, because of the way mortgage loans are structured, you’ll pay a disproportionate amount of your loan’s total interest during the first few years after refinancing.

Pros & Cons of Conventional Home Loans

Like everything else in life, conventional loans have advantages and disadvantages. They offer lots of choice and relatively low interest, among other upsides, but can be less flexible in some important ways.

Pros of Conventional Home Loans

As you explore your options for taking out a mortgage loan, consider the following benefits to conventional loans.

  • Low Interest. Borrowers with strong credit can usually find the best deal among conventional loans.
  • Removable PMI. You can apply to remove PMI from your monthly mortgage payments as soon as you pay down your principal balance below 80% of your home’s value. In fact, it disappears automatically when you reach 78% of your original home valuation.
  • No Loan Limits. Higher-income borrowers can borrow money to buy expensive homes that exceed the limits on government-backed mortgages.
  • Second Homes & Investment Properties Allowed. You can borrow a conventional loan to buy a second home or an investment property. Those types of properties aren’t eligible for the FHA, VA, or USDA loan programs.
  • No Program-Specific Fees. Some government-backed loan programs charge fees, such as FHA’s up-front mortgage insurance premium fee.
  • More Loan Choices. Government-backed loan programs tend to be more restrictive. Conventional loans allow plenty of options among loan programs, at least for qualified borrowers with high credit scores.

Cons of Conventional Home Loans

Make sure you also understand the downsides of conventional loans however, before committing to one for the next few decades.

  • Less Flexibility on Credit. Conventional mortgages represent private markets at work, with no direct government subsidies. That makes them a great choice for people who qualify for loans on their own merits but infeasible for borrowers with bad credit. 
  • Less Flexibility on DTI. Likewise, conventional loans come with lower DTI limits than government loan programs. 
  • Less Flexibility on Bankruptcies & Foreclosures. Conventional lenders prohibit bankruptcies and foreclosures within a certain number of years. Government loan programs may allow them sooner. 

Conventional Mortgage vs. Government Loans

Government agency loans include FHA loans, VA loans, and USDA loans. All of these loans are taxpayer-subsidized and serve specific groups of people. 

If you fall into one of those groups, you should consider government-backed loans instead of conventional mortgages.

Conventional Loan vs. VA Loan

One of the perks of serving in the armed forces is that you qualify for a subsidized VA loan. If you qualify for a VA loan, it usually makes sense to take it. 

In particular, VA loans offer a famous 0% down payment option. They also come with no PMI, no prepayment penalty, and relatively lenient underwriting. Read more about the pros and cons of VA loans if you qualify for one. 

Conventional Loan vs. FHA Loan

The Federal Housing Administration created FHA loans to help lower-income, lower-credit Americans achieve homeownership. 

Most notably, FHA loans come with a generous 96.5% LTV for borrowers with credit scores as low as 580. That’s a 3.5% down payment. Even borrowers with credit scores between 500 to 579 qualify for just 10% down. 

However, even with taxpayer subsidies, FHA loans come with some downsides. The underwriting is stringent, and you can’t remove the mortgage insurance premium from your monthly payments, even after paying your loan balance below 80% of your home value.

Consider the pros and cons of FHA loans carefully before proceeding, but know that if you don’t qualify for conventional loans, you might not have any other borrowing options. 

Conventional Loan vs. USDA Loan

As you might have guessed, USDA loans are designed for rural communities. 

Like VA loans, USDA loans have a famous 0% down payment option. They also allow plenty of wiggle room for imperfect credit scores, and even borrowers with scores under 580 sometimes qualify. 

But they also come with geographical restrictions. You can only take out USDA loans in specific areas, generally far from big cities. Read up on USDA loans for more details.

Conventional Mortgage Loan FAQs

Mortgage loans are complex, and carry the weight of hundreds of thousands of dollars in getting your decision right. The most common questions about conventional loans include the following topics.

What Are the Interest Rates for Conventional Loan?

Interest rates change day to day based on both benchmark interest rates like the LIBOR and Fed funds rate. They can also change based on market conditions. 

Market fluctuations aside, your own qualifications also impact your quoted interest rate. If your credit score is 800, you pay far less in interest than an otherwise similar borrower with a credit score of 650. Your job stability and assets also impact your quoted rate. 

Finally, you can often secure a lower interest rate by negotiating. Shop around, find the best offers, and play lenders against one another to lock in the best rate.

What Documents Do You Need for a Conventional Loan?

At a minimum, you’ll need the following documents for a conventional loan:

  • Identification. This includes government-issued photo ID and possibly your Social Security card.
  • Proof of Income. For W2 employees, this typically means two months’ pay stubs and two years’ tax returns. Self-employed borrowers must submit detailed documentation from their business to prove their income. 
  • Proof of Assets. This includes your bank statements, brokerage account statements, retirement account statements, real estate ownership documents, and other documentation supporting your net worth.
  • Proof of Debt Balances. You may also need to provide statements from other creditors, such as credit cards or student loans.

This is just the start. Expect your underwriter to ask you for additional documentation before you close. 

What Credit Score Do You Need for a Conventional Loan?

At a bare minimum, you should have a credit score over 620. But expect more scrutiny if your score falls under 700 or if you have a previous bankruptcy or foreclosure on your record.

Improve your credit score as much as possible before applying for a mortgage loan.

How Much Is a Conventional Loan Down Payment?

Your down payment depends on the loan program. In turn, your options for loan programs depend on your credit history, income, and other factors such as the desired loan balance.

Expect to put down a minimum of 3%. More likely, you’ll need to put down 10 to 20%, and perhaps more still.

What Types of Property Can You Buy With a Conventional Loan?

You can use conventional loans to finance properties with up to four units. That includes not just primary residences but also second homes and investment properties. 

Do You Need an Appraisal for a Conventional Loan?

Yes, all conventional loans require an appraisal. The lender will order the appraisal report from an appraiser they know and trust, and the appraisal usually requires payment up front from you. 

Final Word

The higher your credit score, the more options you’ll have when you shop around for mortgages. 

If you qualify for a VA loan or USDA loan, they may offer a lower interest rate or fees. But when the choice comes down to FHA loans or conventional loans, you’ll likely find a better deal among the latter — if you qualify for them. 

Finally, price out both interest rates and closing costs when shopping around for the best mortgage. Don’t be afraid to negotiate on both. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.


Dear Penny: My Live-in Partner Owns a Home. Does He Owe Me Half for Bills?

Dear Penny,
Ready to stop worrying about money?
Repairs should mostly fall into this category. If you’d need to replace the roof, that’s an expense you’d have even if your partner wasn’t cohabitating with you. But if he accidentally breaks your garbage disposal, he should foot the bill.
Perhaps it made sense for you to do tasks like grocery shopping back when COVID cases were exploding. But are your partner’s health issues so severe that he can’t cook a meal or organize a closet?
It gets tricky with the variable expenses. I think it makes sense for your partner to contribute toward utilities and cable, since these are things you’re both consuming when you’re living together full time.
There’s no way to do a perfect 50/50 split of expenses here. But make sure your partner is matching your effort if you continue to share space with him. Otherwise, it’s time to send him home already.

I say all this assuming your partner isn’t renting out his home. In that scenario, I’d expect him to contribute toward these costs since living with you would allow him to earn a profit. But I’m guessing one of the good things about this arrangement is that you could ask your partner to leave tomorrow and he’d have a place to go.
Related Posts
My partner and I have been together for 15 years, but not really living together. We both own our own homes, mortgage-free. Our financial situation is similar in terms of net worth. 

Because of my partner’s health issues, at the outset of COVID we decided to have him move in with me, as he could avoid grocery shopping, etc. We thought COVID would be a short-term issue. 
My partner and I split all grocery costs and meals out, along with the costs for a biweekly cleaning woman (floors only) and our cat’s expenses. I pay for everything else: cable, utilities, repairs that come up, association fees. 
The pandemic forced millions of people to rapidly change their living and working situations overnight. But fortunately after two years, a sense of normalcy is returning. Many people, even those with health issues, have been able to resume routine activities like grocery shopping. So perhaps it’s time to revisit whether you want to continue this living arrangement with your partner.
If I lived with someone who did the bulk of the chores, I’d go out of my way to treat them. Perhaps I’d pay the tab for any restaurant bill and also chip in extra for groceries. Even if we’d technically agreed to split these costs evenly, it would be a small show of gratitude.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].
But let’s focus on the bills for a moment. If you were roommates renting an apartment, it would make sense to split everything down the middle. No one has an investment in that space. The money you pay buys you a place to live, and that’s that.
It sounds like you allowed your partner to move in solely for his benefit. Hopefully, you’ve benefited as well from the 24/7 companionship you’ve gotten over the past two years. But his comment about you paying half of the expenses for his home seems dismissive.
You’ve paid off your mortgage, which is the biggest expense related to your investment. I’d also put property taxes, homeowner’s insurance and association fees in this category. None of these would change if you told your partner to move out tomorrow. Your partner is still paying these expenses for his home, even though he’s living with you.
Dear P.,
Splitting costs for groceries, cleaning and the cat 50/50 would also seem logical if you were each contributing roughly equal effort. And that, of course, is where I think your partner could do better.
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This is a topic that reasonable people can certainly disagree about. But I think it makes sense for you to be solely responsible for the fixed costs of homeownership.

It becomes trickier when you share space and you each own homes. The homes you bought aren’t just living spaces. If you sold your home tomorrow for three times what you paid, presumably, your partner wouldn’t be entitled to a dime.



Is this really about the money? Or is it about the unequal amount of effort you’re investing?

Paying Off a Mortgage in 5 Years: What You Need to Know

Paying off your mortgage ahead of time might sound like an incredibly savvy thing to do — and in some cases, it is. But it’s not the right money move for everyone.

Pay off a mortgage in five years? It’s an aggressive strategy that may or may not be the smartest choice.

Benefits and Risks of Paying Off a Mortgage Early

Achieving homeownership is, well, an achievement. And since you’re here reading an article about paying a mortgage off early, you’re clearly an overachiever.

Paying off any kind of debt early usually seems advisable. But for most of us, our home is the single largest purchase we’ll ever make — and paying off a six-figure loan in only a few years could wreak havoc on the rest of your finances.

In addition, some mortgages come with a prepayment penalty, which means you could be on the line for additional fees that might eclipse whatever you’d stand to save in interest payments over time. (Mortgages tend to have lower interest rates than many other common types of debt anyway.)

That said, if you have the cash, paying off your home early can lead to substantial savings, not to mention helping you build home equity as quickly as possible.

Let’s take a closer look at the risks and benefits of paying off a mortgage early.

Benefits of Paying Off a Mortgage Early

The main benefit of paying off a mortgage early is getting out of debt. Even minimal interest is an expense it can be nice to avoid.

Additionally, paying off your home early means you’ll have 100% equity in your home, meaning you own its whole value, which can be a major boon to your net worth.

Risks of Paying Off a Mortgage Early

Paying off a mortgage early may come with risks, and not just prepayment penalties (which we’ll touch on again in a moment). In many instances, it can be a plain old bad financial move.

Depending on what your cash flow situation looks like, and what the interest rate on your mortgage is, you might stand to out-earn early payoff savings if you funneled the extra cash to your investment or retirement accounts instead. (You can use this handy dandy mortgage calculator to see how much interest you stand to spend over the lifetime of your home loan — and then compare that to how much you might earn if you invested that money instead.)

Additionally, if you have other forms of high-interest debt, like revolving credit card balances, it’s almost always a better idea to focus your financial efforts on those pay-down projects instead.

To recap:

Benefits of Paying Off a Mortgage Early Risks of Paying Off a Mortgage Early
Saving money on interest over time Possible repayment penalty
Building home equity quickly Lost opportunity for investment growth, which could outweigh interest savings
No longer having to make a mortgage payment every month Less money for other important goals, such as paying down credit card debt

Watching Out for Prepayment Fees

One of the biggest risks of paying off a mortgage before its full term is up is the potential to run into prepayment penalties. Some mortgage lenders charge large fees to make up for the interest they’ll be missing out on.

Fortunately, avoiding prepayment penalties on home loans written after 2014 is easier: Legislation was passed to restrict lenders’ ability to charge those fees. But if your mortgage was written in 2013 or earlier — and even if not — it’s a good idea to read the fine print before you hit “submit” on your lump-sum payment, and ideally before you accept the contract at all.

Steps to Paying Off a Mortgage Early

You’ve assessed the risks and benefits and decided that paying off the mortgage early is the right move for you. Nice!

Now let’s take a look at how to get it done.

Pregame: Considering Repayment Goals When House Shopping

This option won’t work if you’ve already found and moved into a home, but if you’re still in the home-shopping portion of the journey, looking at inexpensive homes can be a great first step toward paying off your mortgage fast.

After all, if the home has a lower price tag, it’ll be easier to reach that goal in a shorter amount of time. Ideally, you want its value to appreciate, so you’ll still want to shop around before just choosing the lowest-priced house on the block.

Maybe you signed your home contract years ago and are just now considering getting serious about early mortgage repayment. Take heart! There are some easy steps to follow to vanish your mortgage in five years or so.

1. Setting a Target Date

The first step: figuring out exactly when you want the mortgage paid off. Choosing your target date will make it easier to figure out how much additional money you need to send to your lender each month.

Five years is a pretty tight timeline for this kind of debt repayment process, but it could be doable depending on your earnings and commitment.

2. Making a Higher Down Payment

The higher your down payment, the less loan balance you have to pay down, so if you can manage it, offer as much as you can right at the start. There are many assistance programs for down payments that might boost your offer and put you on track for paying down your mortgage early.

Also, realize that first-time homebuyers — who can be anyone who has not owned a principal residence in the past three years, and some others — often have access to down payment assistance.

3. Choosing a Shorter Home Loan Term

Obviously, if you want to pay your mortgage off in a shorter amount of time, you can consider choosing a shorter home loan term; most conventional mortgages are paid off over 30 years, though it’s possible to find loans with 15- or even 10-year terms.

However, your interest rate might be higher on those loans in order to make the deal worthwhile to the lender, so for many borrowers, choosing a longer home loan term and making aggressive additional payments is a better option.

4. Making Larger or More Frequent Payments

One of the most achievable ways for most borrowers to pay off a home loan early is to pay more than the monthly minimum, either by adding extra toward the principal in the monthly payment or by paying more than once per month.

Unless you’re due for a six-figure windfall, chipping away at the debt this way might be the smartest option.

But how does one come up with the additional money to funnel toward that goal?

5. Spending Less on Other Things

As with most debt repayment strategies, chances are you’ll need to find other budgetary items to cut back on in order to set aside more money to put toward the mortgage. This could be as small as ditching the daily latte or as serious as choosing to give up a car.

6. Increasing Income

Another option, if there’s just nothing left to cut? Finding ways to increase your income, perhaps by starting a side hustle or asking for that long-overdue raise.

The Takeaway

Pay off a mortgage in five years? While paying off your home loan early could help you save money on interest, sometimes the money is better spent on other financial goals and projects.

Whether a cash-out refinance sounds appealing or you’ll soon be on the hunt for a new mortgage, see what SoFi offers. SoFi’s fixed-rate loans can be used for refinancing or a new purchase.

What about the home loan rates you can find with SoFi? They’re competitive, and locking in soon could be beneficial.

Finding your rate takes just minutes, and there is no obligation.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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