Case Application 3

Case Application on Mortgages

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Case Application on Mortgages

The decision on the best mortgage deal is an important aspect in getting your finances in

order. A person would only sign a deal with the lowest interest rate, and the one he or she would

be able to finance without having to strain. Conventional Mortgages are usually the best types of

mortgages and preferred by high percentage of people globally. This type of loan is not backed

by the federal government or by any government agency and are broken down into conforming

and non-conforming loans. Conventional are given out and served by the private organizations

like banks and financial institutions. These kind of loans do not have the same perk like other

government insure loans. However, the interest rate of conventional mortgage loan majorly

depends on the credit score of a person. According to Baeck & Devaney (2013), a person with

high credit score would have a loan with low interest rate than a person with low credit score.

The first-time borrowers are able to secure conventional mortgage with as low as three

percent down payment. The down payment usually varies based on the personal situation and the

type of property one would like to purchase. An individual who is not a first time borrower the

down payment rate is always at five percent of the value of the house. The individual who wants

to buy a second home he or she would pay a down payment of ten percent. The conventional

mortgages usually have the lowest down payment compared to the other form of loans. In this

kind of mortgage when the buyer put less than 20 percent down payment, then he or she would

be required to make payment for private mortgage insurance (PMI). The payment is made to
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protect the lender is case one defaults on completing the loan, and it varies depending on the loan

type, credit score of the borrower, and the size of down payment made[ CITATION Wei17 \l 1033 ].

A person should have a credit score of 620 to qualified for a conventional mortgage. A

credit score determines the ability of an individual to pay back the loan. The credit score is based

on the credit history, which are in terms of the number of accounts the person has, the total level

of debt, and the repayment history. The number of credit score is usually between 300 to 850.

Lenders are using this credit score to determine and evaluate probability of the individual to

repay the loan at the required time. The lenders are using this number to make decision on

whether to offer loan and by how much or not to offer the loan. A person having a credit score

of 700 and above are most likely to be offered loan and with the lowest interest rate possible. An

individual credit score, his or her statistical analysis on creditworthiness would directly affect

how much the person pays for the credit. The lenders are using these data before consider to

offer credit to an individual.

The debt-to-income ratio (DTI) of a buyer also plays an important factor in conventional

loan qualifying. The ratio compares the total monthly debt of the person to his or her gross

income. Debt-to-income ratio determines how large a mortgage payment would fit the borrowers

monthly budget. According to Umardani,( 2019) most lenders expects this ratio to be 36 percent

or less of income of the borrowers. Conventional mortgages are very favorable as they can allow

the debt-to-income ratio to be 43 percent. The ratio is calculated by adding all the minimum

monthly payments on all the person’s debt. A conventional loan should fall within the loan limit

set by the Fannie Mae and Freddie Mac, which is $484,350. The limit is expected to rise to

about $510,400 due to the current global economic status. The loan size is an important factor

that most lenders are considering before deciding to offer a loan for an individual. The size
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would be one that is favorable and can easily be repaid without defaulting. The limit should be

within the borrower’s debt-to-income ratio.

A conventional mortgage is available to anyone who can meet the set requirements by the

lenders. It does not limit those who are allowed to borrow the loan. It is very important for one to

set a given amount of money before deciding to go for conventional mortgage. The money

should be within the given percentage set by the lender, which is always 5 percent for those who

are not first time borrowers. This kind of loan generally offer lower interest rate than all the

other type of loan. A person who meet the set credit score requirement is expected to have a

down payment of almost 3 percent. The number of credit score is usually between 300 to 850,

which are used by to determine and evaluate probability of the individual to repay the loan in the

required time.
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References
Baeck, S., & Devaney, S. A. (2013). Determinants of the Type of Mortgage: Conventional or Federally
Guaranteed Mortgage (FHA or VA). Journal of Financial Counseling and Planning 14(2), 20-35.

Umardani, D. (2019). Conventional Home Loan and Islamic Home Financing in Comparative Perspective.
Shirkah Journal of Economics and Business volume 3, 12-30.

Weiss, N. E., & Jones, K. (1-17). An Overview of the Housing Finance System in the United States.
Conventional Research service, 2017.