What triggered your dream of buying a home? Is it that your family is outgrowing your rental space, or do you want to own a home? Whatever your reason is, maybe you have been figuring things out from a breathtakingly beautiful backyard to freshly decorated rooms. You most likely didn’t think of the long days you will spend evaluating various conventional mortgage options and talking to lenders. It is already becoming hard for you with the mortgages such that you feel like giving up your dream. What better opportunity do you have other than quitting? Here is a home loan option that you should know more about as you make your mortgage decision:
What Is a Conventional Loan?
A conventional loan is a mortgage that is not insured by any government agency such as the FHA loans or VA loans. Conventional home loans often satisfy the loan guidelines put in place by the Federal Housing Administration, and they conform to the down payment and income limits set by Fannie Mae and Freddie Mac. The private lenders back the loan, and the borrower pays the insurance. Conventional loans are the most popular home financing option compared to government-insured financing. This is a clear indicator that it can be a bit harder for you to qualify for the loan.
Conventional Vs. Government-Backed Loans When looking for a mortgage option, it is crucial to get the difference between conventional loans and government-backed loans. Types of Conventional Loans There are various types of conventional loans. Conforming Conventional Loan A conforming conventional loan is any loan that meets the guidelines set by Fannie Mae and Freddie Mac. Does that sound like your friendly neighborhood old folks? No, Fannie Mae is the short form for the Federal National Mortgage Association. Freddie Mac stands for the Federal Home Loan Mortgage Corporation, which are government-sponsored enterprises that purchase mortgages from lenders. One of Fannie and Freddie’s most essential lending rules is the loan limit set annually. It is known as the baseline because the maximum amount or limit you can borrow is adjusted every year to match real estate market changes. In some high-end areas, the loan limit tends to higher than it is for other areas.
Nonconforming Conventional Loan Non–conforming conventional loans are conventional loans that are beyond the conforming limit for the area. They are often referred to as jumbo loans. Since they do not conform to the guidelines, the lenders or private financial institutions fund them. The loans are high risk and have strict requirement needs, making them hard to sell on the secondary market. Due to the increased risk involved and the low selling rate, they are less attractive to lenders, and not so common. Adjustable Conventional Loans A fixed-rate mortgage loan has the same interest rate and the same monthly payment throughout the life of the loan. However, with an adjustable-rate mortgage loan, you’ll get a fixed interest rate for a set period, generally between three and ten years. After which your interest rate can adjust each year depending on the current market rates. Adjustable conventional loans usually have lower interest rates than fixed conventional home loans initially, but their cost can be higher overall if market mortgage rates increase over time.
Portfolio Loans A portfolio loan is a conventional loan that a lender chooses to keep in its portfolio instead of selling it on the secondary market. The practice is standard but requires conforming loans. A portfolio loan gives lenders more flexibility with underwriting, which can be good for you if you have a low credit score or high DTI. However, portfolio loans tend to come with higher interest rates and do not offer all the consumer protections that come with conforming loans. Amortized Conventional Loans These are fully amortized loans, which give homebuyers a set monthly payment from the beginning to the end of the loan repayment period, without a balloon payment. Amortized conventional home loans can have fixed or adjustable mortgage rates. Subprime Conventional Loans Conforming loans require that you have a debt-to-income ratio below 50% and a credit score of 620 or higher. However, suppose you have a less than stellar credit scores, a high debt to income ratio, recent bankruptcy, or a home with a high loan-to-value ratio, usually up to 90% for a conforming loan; in that case, you may qualify for a subprime mortgage loan. These loans are high risk and non-conforming and may charge high closing costs and interest rates. However, they can also provide a way to get into a home without waiting until your credit is in excellent shape.
Conventional Loan Requirements The conforming loan guidelines only determine the types of loans Fannie and Freddie will purchase. Lenders have the right to set their requirements for their loans, as long as they don’t conflict with the conforming loan guidelines. It is, therefore, possible to find lenders who have more stringent requirements than others. Credit scores Credit score requirements vary from lender to lender, although 620 is the standard minimum credit score you require to get a conventional loan. It would be best if you had a minimum score of 740 to bag a good mortgage rate. The term of a conventional mortgage is typically 15, 20, or 30 years. Down payment A conventional mortgage requires a substantial down payment compared to other types of mortgage loans. Traditionally, conventional lenders require a down payment of not less than 20%. However, they now offer a 3% down payment program to compete with the 3.5% minimum down payment option for an FHA loan, but you will have to pay PMI. Down payment requirements vary depending on the lender as well as the borrower’s credit history. In addition to the down payment, you might be responsible for origination and appraisal fees.
Benefits of A Conventional Loan There is no particular right mortgage loan. Therefore, it is essential to know the pros and cons of each mortgage option before you make a choice. Low-Interest Rates Your interest rate on a conventional loan is tied to your creditworthiness. A high credit score can help you get a low interest rate. However, a low down payment will make you pay private mortgage insurance, but you can request to have the insurance requirement lifted once your loan-to-value ratio gets to 80%. Higher Loan Limits Conforming loans have limits, but you can get higher amounts with conventional jumbo loans if you need to. You will not get that form of flexibility from government-backed loans. Flexibility Private mortgage lenders will be more flexible with conventional loans than you will find with government-insured loans because they don’t have an obligation to follow the guidelines set by government agencies. As a result, it will be easier to get a conventional loan that offers flexible down payment options and term lengths, not to mention chances to get a loan if your credit score does not meet the guidelines for a government-guaranteed or conforming loan.
Drawbacks of a Conventional Loan Higher Credit Score Requirements You need a standard credit score of at least 620 to qualify for a conforming conventional loan. Higher Down Payment Requirements Conventional loans require a minimum down payment of 3.5%, which is higher than the 3% minimum you will get with a government-insured loan.