Numbers don’t lie. If you’re looking shopping around for a mortgage, keep in mind that over 60% of US homebuyers opt for conventional loans to purchase their homes. Making these, by far, the most popular mortgage option for first time home buyers to previous home owners.
Why is this the case? In recent years, with the stabilizing housing market, conventional loan lenders are offering exciting and flexible plans. The long-standing requirement of 20% down is no longer a requirement. Today it is possible to get a conventional mortgage with as low as 3% down. One of the many changes and perks a conventional loan offers.
What Is A Conventional Loan?
A conventional loan is a conforming loan that is not backed by a government agency such as the USDA, VA, or FHA. The term ‘conforming’ means that the loan follows mortgage guidelines that are set by Fannie Mae and Freddie Mac. The two (Fannie Mae and Freddie Mac) are responsible for standardizing mortgage loans in the US.
Just because they are not backed by the government doesn’t mean they’re not good loans. In fact, they’re becoming an increasingly popular choice with first-time homebuyers that have decent credit and can afford a down payment. With the housing market stabilizing, lenders are able to give out better rates, and conventional loan borrowers mortgages aren’t highly regulated by the government, like with some other loans.
Types of Conventional Loans
Conventional mortgage loans come in two different options:
- Fixed-rate mortgage (FRM) loans – This is a type of loan whose interest rate stays the same for the entire duration of the loan. That means your interest rate will not change even when market rates change.This is a good option for people who don’t want to keep track of changing monthly payment amounts. However, the downside is that you won’t be able to take advantage of lower interest rates if they decrease on the market. Of course, that is also a benefit in disguise because an increase in the rates does not increase your monthly payments either. Most conventional loans are FRMs.
- Adjustable-rate mortgage (ARM) loans – Contrary to fixed-rate loans, the interest rate charged on an ARM changes with the market rates.That means an increase in market rates will increase the rate of your loan and vice versa. In most cases, you will start with a low interest that will increase gradually over the duration of the loan. This is a good option when the rates are low but will increase if rates go up. Most lenders offer ARMs in periods of 3, 5, 7, and 10 years.
Benefits of Conventional Loans
- There are few to no limitations on the type of property you can buy with a conventional loan.
- You get to choose between ARM and FRM, depending on your financial plan.
- Lenders don’t ask for monthly insurance payments if you put 20% down. You can also cancel your mortgage insurance when your house’s equity reaches 20%.
- Allows flexible down payment options with some lenders asking for 3% only.
- You get to choose a loan term that matches your financial ability. You can get a 5-year loan or a 30-year loan with other term options in between.
- Available for first-time as well as repeat buyers.
Unlike many other loans, a conventional loan can be applied to almost any property type. It’s almost as if there are no limitations on the type of home you can buy using a conventional loan.
- 1, 2, 3, or 4-unit properties
- Second homes
- Investment/rental properties
- Condominiums (condos)
- Planned unit developments (PUDs)
- Manufactured homes
- Co-op properties
To be on the safe side, it is best to ask your lender about what properties are eligible before you start the application process. At TJC Mortgage, we allow a wide selection of homes, but this may be different with other companies.
Do You Qualify For A Conventional Loan?
Now you know which properties that are eligible. But what about yourself? Do you qualify Chances are you do, as long as you meet the standards set by Fannie Mae and Freddie Mac.
Check them out below:
Income: your income should reflect your ability to repay the mortgage. Generally, a debt-to-income ratio of 38% is acceptable for most lenders. That means your gross monthly mortgage payments should not be more than 36% of your monthly income.
Credit: a credit score of 620 or above is ideal. Lenders can choose to be flexible when considering your FICO score. The higher your score, the better your terms and rates will be. If you have less than perfect credit, you might need to increase your down payment to qualify.
Other Conventional Loan Requirements
Bankruptcy: even if you have a history of Chapter 7 bankruptcy you may still be eligible for a conventional loan, as long as it has been at least 4 years.
Limits: the maximum amount that you can borrow with a conventional loan varies from state to state and depends on the type of property. Normally, the value ranges from $424,100 to $815,650. Most lenders will offer anything from 80 to 95% financing for the appraised value of the house or its selling price – whichever is lower.
Down payment: this one varies from one lender to another, but it ranges from 3% to 25%. Usually, the more you put down, the lower your interest rate will be, and the less likely you will be required to pay mortgage insurance.
Mortgage insurance: if you make a down payment of less than 20%, you will be required to pay private mortgage insurance (PMI). The lower your down payment, the more your PMI will be.
Closing costs: conventional loan closing costs include fees like title insurance, appraisal, and credit reports. You can pay them out of pocket, or you can negotiate with your lender or seller to cover them. This could save you the closing cost, but might result in a slightly higher interest rate.