Conventional Loan Guide: Everything You Need to Know

What is a Conventional Loan?

Conventional loans are mortgages made by private lenders that meet the underwriting requirements of Fannie Mae or Freddie Mac, two of the largest acquirers of mortgages on the secondary market. In fact, nearly 70% of all home loans made in the United States are conventional. Fannie and Freddie are government-sponsored entities (GSEs), not agencies, that are regulated but not operated by the U.S. Government.

There are two main characteristics of conventional mortgage products. The word “conventional” refers to a loan not insured by a government agency (unlike FHA, VA and USDA loans which are backed by government-operated insurance pools). Also, the size of conventional loans cannot exceed conforming loan limits set by the Federal Housing Finance Agency (FHFA). Given the close association of the two features, you’ll often hear the two words “conventional” and “conforming” in the same breath.

Conventional Loan Programs

Until recently, getting a conventional mortgage meant making a 20% down payment. That wasn’t a very pleasant situation for first-time home buyers, who often had less cash saved up to buy a home. In the past, conventional loans were mostly used by “move up” buyers who could use the equity from their first home as the source of down payment money to buy a bigger home.

However, the world is different today; several conventional loan programs that require less money down (e.g. 3% or 5%) and compete directly with traditional low down payment programs like FHA. What’s more, some conventional mortgages are specifically designed for low and moderate-income borrowers.

One thing that's been consistent, over time, is that borrowers generally need good credit to qualify, namely a FICO score of 680 or higher.

Conventional Purchase Loan

This is your straight-up, classic version of a home loan for borrowers with good credit and at least a 20% down payment. When the LTV is 80, no mortgage insurance is required. Pricing is very competitive, especially when you can skip the extra monthly add-on for those insurance premiums.

Conventional 97

This Fannie Mae Conventional 97 program is for first-time homebuyers only. That’s not as harsh as it sounds. It just means you can’t have a current interest (ownership) in another property nor an interest within the last three (3) years. For example, if you sold a house five years ago and rented ever since, you're an eligible first-time buyer. This program only requires 3% down.


Here’s another Fannie Mae program but for low to moderate-income borrowers; income limits apply. Furthermore, applicants will need to talk a homeowner education course to become eligible. For HomeReady, borrowers only need a 3% down payment. And it’s open to buyers who’ve owned a home within the last three (3) years.

Home Possible (+ Home Possible Advantage)

These two, similarly named programs, are Freddie Mac’s low down payment options. The down payment requirements are either 3% or 5%, depending on the number of units in the property (1 to 4). A one-unit property qualifies for the Home Possible Advantage loan and requires 3% down. Multi-unit properties qualify for the Home Possible mortgage program and require 5% down.

Applicants do not need to be first-time home buyers, but they do need to take an online or in-person homeownership course to qualify.

Conventional Refinance

If you’re looking to cash out some built-up equity, take advantage of a lower interest rate, or convert to a shorter-term mortgage (e.g. change from a 30-year to a 15-year loan), conventional refinance programs are available, too. The amount of cash you can extract varies by program.

Conventional Loan Requirements

Loan Application

To get started with a loan application, you’ll need to round up the following documents:

  • State-issued ID like a driver’s license or passport
  • 2 years tax returns
  • 2 years W2s
  • 30 days, most recent pay stubs
  • 2 months, most recent bank statements (all pages, even if blank)
  • Other sources of income (retirement accounts, social security statements, and alimony are the most common)

If you’re self-employed, a more extensive set of documents is required. You’ll most likely be asked to provide:

  • 2 years Profit & Loss (P&L) statements

And, if applicable:

  • Bankruptcy discharge paperwork
  • Divorce decrees
  • Homeowners’ Association (HOA) statement

KEY TIP: Getting a pre-approval before home shopping could save you a lot of time and heartbreak. Knowing what you can afford - in advance - will help you focus on the right price range, reducing the odds of falling in love with a house you cannot afford. Plus, most sellers won’t allow buyer’s agents to show their home unless the home shopper can demonstrate his/her ability to buy it.

Conventional Loan Down Payments

It’s easy to see, from the conventional programs listed above, that there is more than one way to get a loan with only 3% to 5% down. What’s more, down payment gifts, grants and “affordable seconds” are allowed, too. Gifts must be made with no expectation of repayment to the donor; they cannot be a loan. You and your donor will sign a gift letter stating as much. Breaking this rule can bring a world of pain (legal trouble) to either party.

Private Mortgage Insurance (PMI)

While conventional loans are available with only 3% to 5% down, putting up less than 20% will require you to carry private mortgage insurance (PMI). Mortgage insurance is a small fee, added to your monthly mortgage payment, which protects lenders should the loan go into default.

The PMI rate varies based on the loan-to-value ratio (LTV), which is the amount you owe compared to the home’s value (based on the purchase price or appraised value, whichever is less). The more you put down, the lower your insurance rate.

One cool thing about PMI is that the calculated rate decays over time until it eventually goes away. Meaning, as you build up equity in your home, the amount of mortgage insurance you pay goes down.

Here’s another good thing about private mortgage insurance: you won’t have to refinance your loan to get rid of it. By contrast, the only way to get rid of FHA mortgage insurance is to refinance the mortgage.

Lastly, the final bit of good news regarding PMI: conventional mortgages do not require one-time mortgage insurance premium at closing. That’s different than government-insured programs like FHA loans, which require an upfront mortgage insurance premium (UFMIP) and VA and USDA loans, which have an upfront “funding fee.”

Conventional Loan Limits

Conventional loans cannot exceed the conforming loan limits set by the FHFA. Loans that exceed the limits are called Jumbo Loans and carry a slightly higher interest rate.

Credit Scores

Conventional programs require a FICO score of 680. Some programs allow scores as low as 640. Compare that to FHA loans, where the FICO score requirement is 620 (and as low as 580 in some cases). FHA loans require a 3.5% down payment, which is still a pretty good deal.

Waiting Periods

If you had the unfortunate experience of going through a bankruptcy or foreclosure, you could still get a conventional loan after a certain amount of time, known as a waiting period. With the passage of time, all wounds heal. Here are a few common derogatory credit events and their waiting periods:

  • Chapter 7: 4 years
  • Chapter 13: 2 years from discharge or 4 years from dismissal date
  • Short Sale: 4 years
  • Foreclosure: 7 years

Debt-to-Income (DTI) Ratio

Underwriters will determine what you can afford based on the how much debt you carry compared to your income, called a debt-to-income (DTI) ratio. Two calculations comprise DTI. The first calculation, called a front-end ratio, shows what percentage of your monthly income will be used to make your monthly mortgage payment.

Mortgage Payment / Gross Income = Front-End Ratio

The second calculation, called a back-end ratio, is very similar to the front-end ratio but it adds all your monthly debt obligations.

Mortgage and Debt Payments / Gross Income = Back-End Ratio

For conventional mortgages, underwriters place more emphasis on back-end ratios. Here are those ratios for some popular programs:

  • Conventional 97: 43%
  • HomeReady: 45%
  • Home Possible: 45%
  • Home Possible Advantage: 43%

Property Eligibility

All single-family, one-unit properties are eligible for any conventional loan program. From there, the kind of home you want to buy or refinance gets a little tricky. Each program has its guidelines for condos, manufactured homes, PUDS, and co-ops. Rather than bore you with the details, you may just want to ask a loan advisor about your particular situation and the kind of home you want to finance.

The home you purchase must be your primary residence. You must plan to live there.


Conventional loan terms are available as 10, 15, 20 and 30-year fixed rate mortgages. Adjustable rate mortgages (ARMs) are available, but not for every program. By far, 30-year terms are the most popular choice.

Conventional Loan FAQs

How long will I have to pay private mortgage insurance?

You only need to pay mortgage insurance until you’ve paid down the loan balance to 80% pf the home’s original appraised value. At that time, you can request a PMI cancellation. PMI goes away on its own at 78% LTV.

Can I get a conventional mortgage as a first-time home buyer?

Absolutely! Today, it is easier than ever for first-time homebuyers to use conventional financing for their first home.

Can I use a conventional loan to buy an investment property?

Some programs allow investment property financing. Though, you’ll likely need to come to the table with a higher down payment. You’ll also need more reserves (cash-on-hand).

Can I use a conventional loan to buy a second home?

Yes, if you occupy the home for part of the year and it is a one-unit dwelling. The property cannot be used as a rental or timeshare.

What happens if my credit score is lower than conventional program guidelines?

If your FICO score falls short of the published guidelines, your loan advisor will find another mortgage program for which you qualify.

What kind of closing costs can I expect?

Conventional mortgages have the same closing costs as most other loans and include things like appraisals, escrow fees, title search, government recording fees, etc. However, you will not have to pay upfront mortgage insurance premiums like FHA, VA or USDA loans.

How long does it take to get a conventional loan?

When market conditions change, lead times on loan processing, underwriting and appraisals can slow down. For example, if interest rates go down quickly, refinance and purchase activity goes up in the residential real estate market. Yet, the capacity (number of people who provide services within the industry) is fixed.

The national average for “time to close” is roughly 45 days. You can make it faster by being prepared, like gathering your pre-approval documents (bank statement, pay stubs, etc.) in advance. By far, one the best things you can do is to make sure you’re pre-approved before home shopping.

Advancements and “digitization” of loan underwriting improves the overall lending process. In fact, many mortgage companies can fund loans in as little as ten (10) days.

Are home inspections required?

No. But it’s a really good idea to have a professional inspection in case there are any major flaws with the home. You’ll want to know, before you buy, that the home is safe and sound. Plus, if any defects show up, you and your real estate agent can negotiate to have the seller fix them (a contingency requirement) before you close.

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FHA vs Conventional Loan: Which One is Right For You?


If you’re a renter, chances are you’d rather not be. Rent is skyrocketing across the country, along with home prices, forcing many consumers in less-than-ideal financial situations to consider buying sooner rather than later.

It’s absolutely possible to buy a home on a lower income, but chances are you’ll struggle to save for a 20% down payment – especially if you live in a hot market where housing values are rising quickly. Most experts will advise anyone in this situation to consider an FHA mortgage over a conventional one.

That can be good advice, but FHA loans come with their own set of drawbacks compared to conventional loans. Like many financial tools aimed at low-income consumers, the difference between helpful and harmful is a thin line when it comes to an FHA mortgage.

Read ahead for everything you need to know about the difference between FHA and conventional mortgages, and how to choose between the two.

What is an FHA Loan and a Conventional Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration from the U.S. Department of Housing and Urban Development. Currently, the FHA is responsible for almost eight million mortgages across the country.

The FHA doesn’t give out loans directly. Instead they back loans made by FHA-approved lenders. If for some reason the borrower defaults on the loan, the FHA will repay the lender for their loss.

Because the FHA is less stringent about approving borrowers, people who choose FHA loans tend to have lower incomes and credit scores. Without the FHA program, many prospective homeowners simply couldn’t qualify for a mortgage.

As part of being approved for an FHA loan, borrowers are usually expected to take financial literacy classes. These classes can be taken online or in-person, and are often full of practical tips to help people improve their finances and become good borrowers.

A conforming or conventional loan is the name given to a loan that isn’t sponsored by the FHA, VA, USDA or other type of government program. It can also be called a non-government sponsored entity or non-GSE loan.

Credit History

One of the main reasons why people choose an FHA loan over a conforming or conventional loan is because they don’t have a solid credit history or a high enough credit score.

To qualify for an FHA loan with a 3.5% down payment, you only need a credit score of 580 or higher. If you have a score between 500 and 579, you’ll have to put down 10% in order to be approved.

Conventional loans are much more stringent. The minimum credit score for most conventional loans is 620, though you’ll pay lower interest rates the closer your credit score is to perfect. According to loan processor company Ellie Mae, in 2017 the average credit score for FHA loans was 686, while the average for conventional loans was 752.

Mortgage advisor Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” said some credit events, like bankruptcies, foreclosures or short-sales can also disqualify you from a conventional mortgage. However, you can be approved for an FHA loan even with a mark like that on your credit history.


Whether you choose a conventional or FHA loan, you’ll have to pay a monthly or annual insurance fee if you put less than 20% down. On a conventional loan, that fee is known as Private Mortgage Insurance (PMI). An annual PMI fee costs between .3% and 1% of the total mortgage, and can be added to your monthly mortgage bill or paid once a year.

MIP or Mortgage Insurance Premium is what the FHA adds to your loan every month to help pay for the insurance that covers the lender in case you default. The MIP varies based on your loan amount, term length and down payment. For loans longer than 15 years, the MIP ranges between .8% and 1.05% of the total mortgage. Loans less than 15 years have an MIP between .45% and .95%.

Borrowers who choose an FHA loan also have to pay a lump sum fee at closing, costing 1.75% of the total loan. This fee can be financed as part of the loan if you can’t afford to pay it upfront. On a $200,000 mortgage, this would cost an extra $3,500. That’s on top of the normal closing costs than every borrower pays.

“Because of these extra fees, the long-term cost [of an FHA loan] is higher than a conforming loan,” Fleming said.

Another drawback to FHA loans with less than 20% down is that the borrower is stuck with MIP unless they sell the house or refinance the loan. It used to be that MIP fell off once the borrower had enough equity, but now it’s permanent. You can’t refinance your mortgage directly with the FHA – you’ll have to go through a conventional lender.

Unlike MIP, PMI can fall off the loan automatically without refinancing once you reach 22% equity in the home. However, this depends on the type of loan you get. Many conventional loans also don’t allow PMI to come off automatically. You may have to request it in writing or refinance the loan entirely.

Down Payments

For years, the best way to put less money down was to choose an FHA loan because of the 3.5% down payment option. Now conventional loans allow borrowers to put down as little as 3%. This undercuts one of the main reasons why people would choose an FHA loan over a conventional loan in the first place.

Having said that, you should almost always put down the largest sum you can reasonably afford. The more you put down, the lower your monthly payment and the less interest you’ll pay overall.

Debt-to-Income Ratio

A top factor that lenders look for when evaluating a borrower is their debt-to-income ratio, or how much of their monthly income goes toward debt payments. The lower your DTI, the more likely you’ll qualify for a mortgage and get a good interest rate.

You can have a DTI of up to 43% and still qualify for a conventional mortgage. FHA loans will approve borrowers with DTIs up to 50% or sometimes higher. This small difference is important for borrowers who have high student loans, car loans and other types of outstanding debt.

How to Choose

Interest rates are lower with an FHA loan, though the MIP will often counteract those savings.Because FHA loans will cost you more money in the long run, only people who truly can’t qualify for a conventional mortgage should choose the FHA.

If you do choose an FHA loan, consider refinancing once your credit score has improved, you have more than 20% equity in the home and your DTI is lower than 43%. You’ll pay some money upfront to refinance, but you’ll save in the long run by having a conventional loan.

Even if you’re completely certain you won’t qualify for a conventional mortgage, talk to your lender about your options and financial situation. They’ll be able to steer you in the right direction after asking about your debt, income, credit score, work history and other factors.

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Downsizing with a Reverse Mortgage


For many older Americans, owning a large house just isn’t necessary anymore.

Maybe you’ve been thinking about finding a smaller house that suits your needs, moving closer to family or retiring in a warmer climate.

If retirement is on your mind, chances are that you might want to free up some of the money you’ve accumulated in your home.

Sometimes, people who want to move and access more of their home equity will downsize. Normally, this requires selling the home with one transaction and purchasing a new home with another. With a traditional mortgage, there will also be monthly mortgage payments in addition to other expenses. Sounds like a hassle.

A Built-In, Two-For-One Kind of Deal

A special type of reverse mortgage allows qualified Americans 62 or older to purchase a new home with no monthly mortgage payments.1 Also known as the Reverse for Purchase or HECM for Purchase, this is a federally insured loan built to help older adults reach their financial goals when buying a new home.

Instead of downsizing (going through multiple transactions and the stress of having new monthly payments), you could buy a new home with one transaction and no monthly mortgage payments. To start, you’ll provide a down payment using your savings or the money from the sale of your current home. This provides enough equity for a reverse mortgage to cover the rest of your new home’s value.

Usually, the down payment will be a little less than half of the new home’s value. This means that if you want to downsize by using a reverse mortgage, you could sell your home and purchase a more modest property for half its value with no monthly mortgage payments. As long as you live in the new home as your primary residence, the reverse mortgage will not come due.1 However, interest will accrue gradually, just like with any other loan.

If you ever choose to sell the home, move out or no longer live there, the reverse mortgage will come due, and the loan will need to be repaid. But, since it’s a federally insured loan, you’ll always be protected, no matter what the loan balance becomes. Even if it exceeds the value of your home, you’ll be able to repay the loan in full by selling the home.

You or your heirs could choose to keep the home by paying either the loan balance or 95% of the appraised value, whichever amount is less.

The Reverse Mortgage Lets You Do Both

Typically, when people compare getting a reverse mortgage to downsizing, they talk as if they have to do either one or the other. But the reverse mortgage is a flexible loan – it lets you purchase a new home while accessing the money in your old home, so there’s nothing stopping you from selling a high-value home and then using your reverse mortgage to buy a smaller home. Doing so allows you to bypass monthly mortgage payments.

In the end, you won’t have to deal with repaying the reverse mortgage until it comes due, thus making it a great tool for downsizing and preparing to settle in for retirement.

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The question of interior design can be a very conversational topic; do we, don’t we, what exactly is it?

Interior design is the appearance of the property within. Colours on the walls (whether paint or wallpaper), flooring, lighting, furniture and finishing’s all fall within interior design.

When spending time and investment re-doing your property, the interior should always be considered. The overall space, comfort and atmosphere becomes a make-or-break situation with interior design.

Space Saver

Interior design can offer smart solutions and have such a big impact to your property. Need that extra space? Thought about making the space under your stairs into cupboards, or putting your TV on the wall to enable you to get rid of the carpet. At London Wells, we look at what it is you want to achieve, and can advise based on your property and budget.


Comfort & Warmth

In your home, you will want certain furnishings to feel comfortable. Having a sofa is great, not if it takes up half the room, blocks the light from the window and you have to squeeze around the side of it to get in. Small changes to furnishings and adjustments of placing can work wonders.


Long Term Gains

Do you re-tile the bathroom or make a wet-room? The upkeep of the interior of the property can be influenced by the design. Some wallpaper will easily wear and tear, some paint fade and need freshening up. All these things have to be considered when it comes to your property. Design the property for you lifestyle and your family – cream carpets and walls may not be ideal for a large, young family, for example.

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Is Guaranteed Issue Life Insurance a Good Option?

We often get asked questions along the lines of “My aging parent is very ill and medical bills have drained his/her savings account, but I cannot afford to pay for the funeral if he/she should pass away.  Can I buy life insurance on my parent?”  In this scenario, we do not advise purchasing “regular” fully underwritten life insurance.  More often than not, term life insurance is going to be ideal for most people, but not in this scenario.

Why we wouldn’t recommend term insurance in this case…

Term life insurance would typically not work in this case because the coverage amount would be too small, the client would likely be uninsurable because of health issues, and the client’s age would be outside the range a life insurance company would approve coverage for.

What we would recommend…

When we get this question, we usually tell inquirers that they have two options:

  1. Take the money you would have spent each month on term insurance and instead put it into a savings account so it can start accruing interest. You can then access these funds later when in need of money for your loved one’s final expenses.
  2. Purchase a guaranteed issue life insurance policy.

What is a guaranteed issue life insurance policy?

Guaranteed issue life insurance is a type of life insurance that you cannot be denied coverage on, hence “guaranteed”.  There are a few things you should know about this type of insurance.

  1. Guaranteed issue life insurance is typically known as “last resort” life insurance. It’s meant for those who may have been denied previously and/or are not in good health.
  2. Guaranteed issue life insurance policies are designed so that surviving loved ones can pay for your final expenses, such as a funeral, burial, and medical bills.
  3. Guaranteed issue life insurance premiums will never increase.
  4. A guaranteed issue life insurance policy accumulates cash value.
  5. Guaranteed issue life insurance policies have significantly lower death benefit amounts compared to term or permanent policies.
  6. There is no medical exam or questionnaire required for guaranteed issue life insurance. The only factor that is really taken into consideration is the age of the insured.  Because of this, guaranteed issue life insurance premiums are higher per thousand than most other types of life insurance.
  7. Benefits are limited to the first two years. This is called a Graded Death Benefit period.  What this means is that if you die within two years of buying the policy for any reason other than an accident, your beneficiaries typically only receive the total amount of what you paid in premiums.  (This can vary depending on the carrier.)

So, if you’re in relatively good health, fully underwritten life insurance may be a better option for you.  However, guaranteed issue life insurance is a great option for those with a desperate need.

How much does guaranteed issue life insurance cost?

While you can get millions of dollars’ worth of term life insurance coverage, guaranteed issue life insurance coverage often caps at $50,000.  Again, its design is based around simply helping your surviving loved ones pay for your final expenses.

Quotacy works with Gerber Life to provide guaranteed issue coverage options.  Gerber’s guaranteed issue policy is available in all U.S. states except for Montana.  Take a look at the examples and table below to get an idea on what a guaranteed issue policy can cost.

Example #1

 John Smith is 55 years old and has been denied for traditional life insurance because of his Stage IV prostate cancer.  He does not want to burden his children with his final expenses so he plans on purchasing guaranteed issue life insurance.

He’s automatically approved without having to undergo a medical exam or fill out any health forms.  John obtains $20,000 in coverage and his premiums are $91.30 per month.

If John passes away within two years, Gerber Life will refund to his beneficiaries all premiums that had been paid plus 10% interest.  However, if John happens to die because of an accident unrelated to his health within those two years, his beneficiaries will receive the full $20,000 death benefit.  After two years, his beneficiaries will receive the full death benefit regardless of how he dies.

Example #2

 Jane Doe takes care of her 79-year-old mother Sally.  Sally does not have any life insurance and Jane is worried that she won’t have the funds to give her mother the funeral she deserves.  Jane decides to buy a guaranteed issue life insurance policy on Sally.

A $12,000 policy is enough for Jane to ensure she can pay for a proper funeral and burial.  Sally is approved for coverage and the policy will cost $165.70 per month.

Although this type of policy is easy to acquire, it offers less coverage and higher premiums than traditional life insurance, so explore all your options.  If you aren’t sure if guaranteed issue life insurance is the best choice for you or want more information, contact us here at Quotacy and we can help you.

Recap of Guaranteed Issue Life Insurance:

  • If you’re between 50 and 80 years old, you can be accepted for guaranteed issue coverage regardless of your health.
  • There are no medical exams to complete or health questionnaires to fill out.
  • Cash value accumulates within the policy.

Remember, term life insurance quotes are free to run on and there is no penalty for applying.  It doesn’t hurt to apply for term life insurance, then opt for the guaranteed issue if you end up being denied.  The more options you have, the better decision you can make.

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What is the VA Renovation Loan?


The VA renovation loan, also known as the VA rehabilitation loan, is a VA-guaranteed loan program that allows homebuyers to purchase a home and fund repairs and improvements.

For many homebuyers, move-in ready homes are hard to find. And, when they are available, the cost can be well above what a lot of homebuyers can afford. This makes fixer-uppers more appealing, but securing funds to pay for the work can be a challenge.

But, with the help of a VA renovation loan, eligible homebuyers can find the perfect fixer-upper and get money to improve the home.

The purpose of a VA renovation loan is to ensure that the home meets the minimum standards to qualify for VA financing. (The VA has minimum property requirements to protect the homeowner’s investment.) Because you’ll be securing a home loan before the repairs are made, getting loan approval is more of a process than with traditional VA loans. That said, once you’re done, you’ll have a purchased home with a VA loan to finance repairs.

VA rehabilitation loan guidelines

In 2018, the VA updated its guidelines to make it possible for Veterans to purchase or refinance a home that is in need of alteration and/or repair with a VA renovation loan. This allows Veterans to take advantage of older homes, while using their earned VA loan benefit.

The Aging housing stock in the United States has contributed to the increased demand for alteration and repair loans. Due to the condition of this aged housing, homes are often sold as “cash or conventional financing” which does not allow Veterans to use their VA earned benefit.” — Veterans Benefits Administration, Circular 26-18-6

Summary of VA Renovation Loan Guidelines

  • Loan Types. You must apply for a VA purchase or VA Cash-out Refinance in order to be eligible to fund your repairs with a VA renovation loan.
  • Minimum Property Requirements (MPR). All homes to be purchased with a VA loan must meet MPR as outlined by the VA. Rehabilitation loans must be used to fund repairs and/or renovations that bring the property up to these standards.
  • Contractor Requirements. You must use a registered VA builder or contractor for any property appraised for alteration and repairs.
  • Project Management. The lender is responsible for evaluating, monitoring, and managing the repair project to ensure that the project is completed per plans so the value of the home is preserved in addition to all aspects of alteration and repair funds.
  • Acquisition Cost + Notice of Value. Rehabilitation loans used in conjunction with a home purchase must use the lessor of the acquisition cost or the as-completed value — this is called the Notice of Value (NOV) and is determined by a VA appraiser. To calculate the total acquisition cost for a purchase, add the contract sale price, total cost of repairs, contingency reserve (if any up to 15 percent of the repair cost), inspection fees, title update fees, and permits.

Example: A $100,000 house with $75,000 in alterations and repairs, and $8,000 for contingency reserve, inspection, and permit fees has a total acquisition cost of $183,000. If the NOV is lower than the acquisition cost, say $180,000, then the lower amount will be used for the loan and the borrower must bring the remaining $3,000 at closing.

But, if the NOV is higher ($190,000 for example), then the lesser $183,000 acquisition cost may be financed.

Also, note that lenders may charge a 2 percent construction fee (on top of the usual 1 percent origination charge) for your loan.

How the VA renovation loan process works

The thing to understand about VA renovation loans is that it’s a second loan, but it works differently than a traditional VA supplemental loan, which can also be used for renovations. Instead of having two separate loans, the VA rehab loan is rolled together with the original purchase loan — you’ll only have one mortgage rate and monthly payment.

Before getting approval for this loan, you’ll need to submit plans for the specific renovations that need to be made, as well as information on the contractor. Because the goal of the program is to make the home VA eligible, you’ll have to prove that the repairs will meet VA standards. This happens during the loan underwriting process.

You’ll need to have a list of the specific improvements, including how much those improvements are going to cost. This takes time, and it can slow down the homebuying process.

After the repairs are made, a VA inspector will assess the home to ensure it meets VA standards.

Can you use a VA loan to remodel your home?

You can’t use a VA renovation loan to remodel every part of your home. Only VA-approved repairs, renovations, and replacements are allowed. This to to ensure that the home is livable to meet VA minimum property standards. The goal of this loan type is not to finance your dream-home remodel — for that, you’ll need a different loan type.

Common improvements allowed by VA rehabilitation loans include:

  • Roof repairs
  • Floor repairs
  • Electrical and plumbing repairs or replacements
  • HVAC repairs or replacement
  • Paint (if lead paint is currently in the home)
  • Foundation repairs
  • Energy-efficiency upgrades

The VA doesn’t specify a minimum or maximum allowable amount for renovation funds. So, if you qualify and only want to make $5,000 in renovations, that’s completely acceptable. That said, some lenders may have maximum amounts they’re willing to finance, so be sure to ask your lender — if the property needs $75,000 of renovations, but the lender will only fund up to $35,000, then they may not be the right lender for your needs.

Who can get a VA renovation loan?

Anyone who is VA-loan eligible is able to get approval for a VA renovation loan. This includes current VA loan homeowners. A VA renovation loan can also be used for refinancing to fund upgrades to your home. This may be a good way to avoid using a cash-out refinance or getting a second mortgage.

To use this loan program as a refinance, homeowners must still follow the same improvement restrictions as new homebuyers.

VA home improvement loans with no equity requirements

The VA offers two other home improvement loans in addition to VA renovation loans that require no equity. Depending on your unique situation, these VA loan options may better suit your needs.

VA Supplemental Loan

VA supplemental loans can be used for the alteration, improvement, or repair of a Veteran’s primary residence secured by a VA mortgage. The improvements must protect or improve the basic livability or utility of the property — barbecue pits and swimming pools do not meet that requirement. Also, no more than 30 percent of the loan may be used for the “maintenance, replacement, improvement, repair, or acquisition of non-fixtures or quasi-fixtures such as refrigeration, cooking, washing, and heating equipment.”

The funds for supplemental loans can be added either to an existing loan or refinance, or the funds can be a second mortgage similar to a home equity loan. The supplemental loan can’t raise the interest rate on your current loan, but it may be higher if it’s a second loan.

Also, for VA supplemental loans loans over $3,500, you’ll need a Notice of Value (NOV) and proof of compliance like the VA rehabilitation loan. For loans under $3,500, you need to supply the expected costs in a statement of reasonable value.

The maximum amount you can borrow will depend on your available entitlement, your area’s loan limits, and the total value of the repairs.

VA Energy Efficient Mortgages

Energy efficient mortgages (EEMs) are loans that let VA mortgage homebuyers (or, owners) cover the cost of energy efficient improvements for their home. In most cases, the VA allows qualified borrowers to raise the VA loan limit up to $6,000 to finance energy efficient upgrades — if you want more than that, you’ll need to secure a Certificate of Commitment from the VA.

Some acceptable energy efficient improvements include (but not limited to) solar heating and cooling systems, additional insulation (ceiling, attic, floor, etc.), storm windows and/or doors, furnace efficiency modifications, and heat pumps.

Additional things to note about VA energy efficient mortgages:

  • Income verification. For EEMs under $3,000, the VA tells lenders that the cost will be offset by decreases in utility bills. But, for projects between $3,000 and $6,000, the lender is responsible for determining if the extra costs are worth it and that you have the income to cover the increased payment.
  • VA contractor not required. If you are a handy person, then you have the option of doing the repairs yourself — the EEM financing would cover just the cost of materials.
  • Upfront funding fee. All VA borrowers pay 1.25% to 3.3% in funding fees when they first take out a VA mortgage. The funds borrowed for EEMs are subject to this upfront funding fee.

Finding a lender

The VA renovation loan is a good option for some homebuyers, but the biggest drawback is that it can be difficult to find a lender that offers the program.

The best way to find a lender that’s willing to offer this type of loan is to check with multiple lenders.

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Term Life Insurance for 35 Years

35 years is a long time.

Think about some of the things that happened or were popular in 1981.

  • Raiders of the Lost Ark
  • MTV began
  • Prince Charles and Lady Diana married
  • Hall & Oates
  • The Rubik’s Cube
  • Donkey Kong

A lot can happen in that time of time. The fall of The Soviet Union. The Internet. Mobile phones. Emoji. 35-yr term life insurance.

Yes, you read that right. You can now buy term life insurance with a term period of 35 years from American General Life Insurance Company.

Until now, the longest term period available was 30 years. But with the new term length, you can lock in a low rate up to age 45 and keep it until you are 80 years old.

Will you need term life insurance for 35 years?

Maybe and maybe not. It all depends on your unique circumstances. Things to consider include:

  • How many years until your youngest child leaves home?
  • How many years until all your children (and perhaps grandchildren) graduate college?
  • How many years until you pay off your mortgage?
  • How many years until you retire?

This is a start, but there’s more to it. Thankfully, we’ve written a thorough guide to help you find out how long you will need term life insurance.

It’s important to note that you are never ‘stuck’ in a policy for the entire term length. Meaning, you can always cancel the policy before the term expires without incurring any penalties or fees. Most life insurance companies will refund any unused premiums as well. Just in time for last-minute holiday shopping!

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Wear And Tear Parts Can Be Covered By An Auto Warranty

Usually, motorists will buy an aftermarket auto warranty or an extended auto warranty for their cars when the factory warranty terminates. When you buy an aftermarket auto warranty, your warranty provider provides coverage for replacement and repair of certain car parts. Here are some things to keep in mind when deciding to buy an aftermarket auto warranty:

An aftermarket auto warranty generally does not cover the costs of replacement and repair parts that break down as a result of wear and tear. An aftermarket bumper-to-bumper warranty provides coverage for most parts in your car, generally with the exclusion of parts such as brakes, tires, and other wear and tear parts. It is smart to invest in a warranty that can cover wear and tear parts in addition to other parts because about eighty percent of your car’s repair costs are a result of wear and tear issues. An auto warranty that covers wear and tear problems will save you money, especially for older cars.


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5 Home Warranty Myths Debunked

While home warranties can be an additional level of protection for your home, some homeowners may have chosen not to purchase one and others may not even know what one is. If you’re wondering how a home warranty could help protect your home, here are five misconceptions and myths debunked.

Myth #1: “I don’t even know what a home warranty is, so I probably don’t need one.”

The more you know about the home systems and appliances in your home that may be covered by a home warranty, the more you may likely appreciate the value. Home warranties usually cover big-ticket items, like your furnace, air conditioner, plumbing, electrical systems and appliances — some of the essential things you use on a daily basis. A home warranty may help cover the repair or replacement of covered items that break down due to normal wear and tear.

Myth #2: “A home warranty is expensive; it’s not worth it.”

Have you ever thought about how much it would cost if you were to replace a major home system?  According to HomeAdvisor, the average cost of replacing a furnace may range from $2,298 to $5,550. Generally, a basic home warranty may cost you between $350 to $500 a year.

Myth #3: “I don’t need a home warranty, because I have all new appliances.”

Unfortunately, new items may break down, too. Without a warranty, you may be leaving yourself open to a potentially expensive repair on a new appliance.

Myth #4: “I maintain all my appliances and systems, so I would never need a home warranty.”

Breakdowns can happen unexpectedly, even to the most attentive homeowners. Routine maintenance can be a great thing and certainly helps, but it is no guarantee that things may not go wrong.

Myth #5: “I have homeowners insurance, so I don’t need a home warranty.”

This is a common misconception. Homeowners insurance and a home warranty are two separate things and offer different coverage. Homeowners insurance may cover things that happen due to an unexpected event, such as a fire or theft. But a home warranty is a service contract that provides for the repair or replacement of covered items when they break down due to normal wear and tear — things that can happen to just about any homeowner at some point.

Make sure to weigh all of the facts, and then decide if a home warranty may be right for you and your home.

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