To qualify for a conventional loan, it's recommended to have a credit score of at least 620. However, lenders may consider other factors. It's always a good idea to shop around and compare offers from different lenders to find the best option. Read on to learn more about the details.

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What Is a Conventional Loan?

A conventional loan is a mortgage that is not insured by the government. This means the creditor assumes all the risk, so they have stricter requirements. Conventional loans can finance the purchase of a single-family home, but they can also be used for other types of real estate such as investment properties or vacation homes.

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Conventional loans have two categories: conforming and non-conforming. 

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Conforming loans meet the guidelines set by Fannie Mae and Freddie Mac, which are two government-sponsored enterprises that purchase mortgages. 

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Non-conforming loans overlook the guidelines for conforming loans, hence more difficult to qualify for and have higher interest rates.

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The requirements for conventional loans vary, but they include a down payment of at least 3%, a credit score of at least 620, and a debt-to-income ratio of no more than 36%. Conventional loans can be great for borrowers who have acceptable credit and can afford the down payment. However, they can be more expensive than government-backed loans, so compare your options.

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Benefits of a Conventional Loan

• Conventional loans are more popular than government-backed loans. You'll have more lenders to choose from, which can help you get a better interest rate.
• Conventional loans have lower down payment requirements. This can make it easier to qualify for a loan, even if you don't have a lot of money saved up.
• Conventional loans have more flexible terms than government-backed loans. You can choose a loan with a longer term, which can lower your payments.
• Conventional loans are not subject to the same income and debt requirements. You might qualify for a conventional loan even if you have a lower income or more debt.

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Drawbacks of a Conventional Loan

• Conventional loans often have higher interest rates. This is because conventional loans are not backed by the government, so lenders have more risk.
• Conventional loans often require a down payment of at least 5%. This can be a barrier for first-time homebuyers, in particular.
• Conventional loans have stricter credit requirements. You'll need a higher credit score to qualify.
• Conventional loans may have prepayment penalties. This means that you could be charged a fee to pay the loan off earlier.

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How Do Credit Scores Affect Mortgage Interest Rates?

Your credit score is an essential factor when determining the interest rate. A higher credit score indicates that you are a lower-risk borrower. In general, a difference of just 50 points can lead to a difference of hundreds of dollars. To save money on your mortgage, work on improving your credit score.

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What Is a Credit Score?

A credit score is a numerical representation of a person's creditworthiness. It is based on a credit report, which is a record of a person's borrowing and repayment history. Credit scores are calculated using a variety of factors, including the person's payment history, their debts, and the length of their credit history. A higher credit score indicates that a person is a lower-risk borrower and is more likely to be approved for loans and credit cards with favorable terms.

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What can affect your credit score:

• The types of credit you have
• Your credit utilization ratio
• The length of your credit history
• Your inquiries
• Your public records

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It is important to keep your credit score in good shape. You can do this by making your payments on time, keeping debts low, and having an extensive credit history. Also, check your credit report for errors and dispute them.

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Types of Credit Scores

• FICO Score: The most common credit score, created by Fair Isaac Corporation. It is based on a scale of 300 to 850, with a higher score indicating a better credit history.
• VantageScore: A newer credit score created by the three major credit bureaus. It is similar to the FICO Score, but it is calculated using a different formula. 
• TransUnion VantageScore 3.0: The most recent version of the VantageScore credit score. It was released in 2014 and is based on a scale of 501 to 990.
• Experian/Fair Isaac Risk Model 2.0: A credit score created by Experian and Fair Isaac Corporation. It is similar to the FICO Score, but it is calculated using a different formula.
• Equifax Beacon 5.0: A credit score created by Equifax. It is similar to the FICO Score, but it is calculated using a different formula.

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Credit Score Range

A credit score is a number that lenders use to assess your creditworthiness. It ranges from 300 to 850, with a higher score denoting a lower-risk borrower. Following are the ranges and what they indicate:

• 300-579: Poor credit
• 580-669: Fair credit
• 670-739: Good credit
• 740-799: Excellent credit
• 800-850: Exceptional credit

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A credit score is based on a number of factors, including:

• Payment history: This is the most important factor. It accounts for 35% of the score.
• Amount of debt: This accounts for 30% of the score.
• Length of credit history: This accounts for 15% of the score.
• Types of existing credit: This accounts for 10% of the score.
• Inquiries: This accounts for 10% of the score.

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How to improve your credit score:

• Pay your bills on time, every time.
• Keep your credit utilization low. This means using less than 30% of your available credit.
• Use different types of credit.
• Keep your credit accounts open to develop your credit history.
• Dispute all errors on your credit report.
• Limit your inquiries.

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It takes time to improve your credit score, but it is possible with effort and discipline.

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Conclusion

Your credit score is a number that assesses your creditworthiness, thus it’s critical when applying for a conventional loan. A higher credit score indicates that you are a lower-risk borrower and are more likely to repay your debts on time. This makes it easier to qualify for lower interest rates.

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If you are curious as to whether your credit score qualifies you for a conventional loan, consult with Wesley Mortgage today!

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