Conventional Loan over a Government Loan

In a sellers market, like the one we are having now in 2022, realtors will take an offer with a borrower getting a Conventional loan over a government loan.

Why? It’s simple, conventional loans have fewer restrictions compared to FHA and VA loans.

In general, realtors don’t care what loan a buyer uses to purchase a property. But they do care about the price they can get and the likelihood of closing the sale.

What restrictions do Government Loans have that Conventional doesn’t?

Appraisal restrictions and money that the seller may have to incur due to the loan being a government loan.

For example,

VA home loan – a government loan

VA loans are the most restrictive. In some states, VA loans are required to have a termite clearance, and the home has to be in good condition to finance.

An appraiser will inspect the home according to VA’s guidelines and if it doesn’t meet the minimum standards, the appraisal will come back with repairs required.

Required repairs are what realtors want to avoid.

The required repairs can delay the closing, it’s also an additional cost that the seller would have to come out of pocket for. For this reason, realtors and sellers avoid accepting VA offers.

There is a misconception in that the home has to be in perfect condition.

That is not the case. The repairs are usually related to safety concerns. For example, foundation issues, moldy sinks, peeling paint, etc.

A stain in the carpet will not require a repair, or a bathroom that is functional but is old will not trigger any repairs.

FHA Home loan – a government loan program

Similar to the VA requirements but less restrictive. A termite clearance isn’t a requirement unless the appraiser notes that there is active infestation.

If the home is in less than good condition, the appraisal can come back with required repairs, which again would be an out of pocket cost for sellers, and can delay the closing.

Same as the VA loan, the repairs would be related to safety concerns.

Learn more: FHA Loans for First Time Home Buyers

Conventional Loans  

Conventional mortgages, don’t have the same property restrictions as the above government loans, which makes it more likely to close escrow on time, and less expense for the seller.

In a sellers market, the sellers hold the power. They don’t want to fix what they don’t need to fix. They want to be able to sell their home with as little frustration and cost to them as possible.

Summary : Why should you pursue a Conventional Loan over a Government loan?

Realtors believe that government home loans are too stringent, and that their client (seller) would need to spend thousands of dollars on repairs that they could avoid if they work instead with a borrower getting conventional loan financing.

Read more: How to Get your Offer Accepted in a Seller’s Market

What documents are needed for a Conventional loan?

A mortgage application is the first document needed. The application lists your income, assets, employment history, how much you currently pay for rent or a mortgage, etc.

Once the mortgage application is completed, then the following documents will be required:

  1. Last 30 days of paystubs, if employed
  2. Award letters, if retired
  3. Last 2 years of tax returns, if self employed
  4. Last 2 years of W2s
  5. Last 60 days of bank statements
  6. Identification, for example a driver’s license or passport

Depending on your situation, additional documents may be requested. Each file is unique, the above documents are the basics that every file starts with.

Is a Conventional Loan harder to qualify for?

Yes, Conventional can be difficult to qualify for. Government loans are more lenient in regards to credit and debt to income ratios.

Conventional requires a down payment and a minimum credit score of 620. Government loans have a minimum score of 620, some lenders will even go down to a 500.

Coole Home: We have a minimum credit requirement of 620 for conventional and 620 for government.

More Information that may be of interest to you:

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