Do you have questions about conventional mortgage loans in California? If so, there’s a good chance you’ll find the answers below. This article explains the general guidelines and requirements for a conventional loan in California. But let’s start off with a basic definition.
What Is a California Conventional Loan?
In California, a conventional home loan is one that is not insured or guaranteed by the federal government. It is originated (and sometimes insured) within the private sector. This sets it apart from FHA, VA and USDA loan programs, which do receive some form of government backing.
Depending on its size, a California conventional loan can either be “conforming” or “jumbo.” Here’s the difference.
- Conforming — A conforming home loan is one that meets, or conforms, to the maximum size limits used by Freddie Mac and Fannie Mae. As a result, it can be acquired by one of these government-sponsored mortgage buyers.
- Jumbo — A jumbo conventional loan is one that exceeds the size limits mentioned above, and therefore cannot be acquired by Freddie or Fannie.
California conventional loans are the go-to mortgage option for many home buyers. Around 60% of mortgage shoppers use conventional financing, as opposed to FHA and other government-backed loans.
Lower costs are one of the benefits to using a conventional loan to buy a house in California. Borrowers who use this option with a down payment of 20% or more can avoid paying mortgage insurance, which reduces the overall cost of the loan.
There are many different types of conventional home loans in California, which gives borrowers some flexibility as to the rate and payment structure. For instance, some conventional loans have a fixed interest rate for the entire term, while others have a rate that adjusts annually. They are available in different terms, or lengths, as well.
Basic Requirements and Guidelines
Let’s move on to discuss some California conventional loan requirements and guidelines in 2017.
Down Payment Guidelines
The down payment requirements for conventional loans have loosened up a bit over the last few years. As of 2017, borrowers in California can obtain a conventional mortgage with as little as 3% down. Inversely, this means you could finance up to 97% of the purchase price.
Improved down-payment flexibility allows conventional home loans to compete with FHA. For years, FHA-insured mortgage loans were the go-to option for borrowers seeking a low down payment. That program allows for a down payment as low as 3.5%. But now, conventional loans are able to compete with FHA in this area. This gives California mortgage shoppers more choices and options, which is a good thing.
Maximum Size for Conventional Loans
As mentioned earlier, conventional home loan have size restrictions. These caps are referred to as conforming loan limits.
These limits vary by county and are based on median home prices. In California, they range from $424,100 in the more modestly priced markets, up to to $636,100 in pricier regions like Los Angeles and the Bay Area. Check the limits for your area.
A conventional loan that exceeds these limits is referred to as a jumbo mortgage. Borrower qualification criteria can be a bit stricter with jumbo products, since there is more money being loaned and therefore a higher level of risk.
Credit Score Guidelines and Requirements
Credit score guidelines for California conventional home loans tend to vary from one mortgage lender to the next. There is no single “cutoff” point used across the entire industry. Additionally, credit scores are just one part of a bigger picture — they’re just one aspect of borrower eligibility.
With that being, mortgage lenders typically prefer to see a borrower credit score of 600 or higher for loan approval. But this number is not written in stone. Please contact us if you have questions about your credit score, as it relates to mortgage approval.
Debt-to-Income Ratio Requirements
Debt-to-income ratios are another key requirement for California conventional loans. Mortgage lenders look at these ratios (or percentages, really) to ensure you’re not taking on too much debt with the addition of a mortgage loan.
As you probably already guessed, a debt-to-income (DTI) ratio shows the relationship between the amount of money a person earns each month, and the amount he or she spends on monthly recurring debts.
When it comes to debt ratios, California conventional loan requirements are fairly flexible. They also vary from one bank or mortgage company to the next. Generally speaking, the maximum DTI for a conventional home loan is around 43%. But again, this number is not written in stone. Exceptions can be made for borrowers with good credit histories and other compensating factors.