The Facts About Conventional Loans:
What is a conventional mortgage?
The usual explanation for a conventional mortgage (also called a conforming mortgage) is a home loan that is not government insured or guaranteed. The FHA, Veteran, and USDA mortgages are all backed (insured) by the Federal government. The alphabet loans (FHA, VA & USDA) require a substantial upfront mortgage insurance premium and monthly mortgage insurance (MIP). The conventional mortgage does not require any upfront mortgage insurance and does not require monthly mortgage insurance if the down payment is 20% or greater.
The conventional loan meets the guidelines of either the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Federal National Mortgage Corporation (Fannie Mae). Think of the conventional mortgage as your father and grandfather’s mortgage. Five, ten, 15 or 20 percent down payment. A down payment of less than 20% requires monthly mortgage insurance.
The Facts About Jumbo Loans:
What is a Jumbo Mortgage Loan?
Jumbo mortgages are home loans that exceed conforming loan limits. A jumbo loan is one way to buy a high-priced or luxury home. If you have a lower debt-to-income ratio, a higher credit score and a larger down payment, a jumbo loan may be right for you.
The limit on conforming loans is $417,000 in most areas of the country, but jumbo mortgages can exceed these limits. Even so, if you’re considering a home in a high-cost area, you may still be able to obtain a conforming fixed-rate mortgage or adjustable-rate mortgage for up to $625,500. FHA loans have limits of up to $729,750.
What are the benefits of a conventional mortgage?
No Upfront Mortgage Insurance: Conventional home loans do not require an initial (upfront) mortgage insurance payment. The FHA, VA, and USDA loan programs all require an upfront premium. The “funding fee”, as it is called, is usually financed with/into the loan. It should be noted that service related 10% disabled veterans are exempt from the VA funding fee. Since conventional home loans do not require the upfront mortgage insurance, the loan amount is lower and consequently, the monthly payment is a bit lower.
No Monthly Mortgage Insurance: The FHA and USDA loan programs require a monthly mortgage insurance payment. The monthly mortgage insurance never goes away . . . even with a 20% down payment or equivalent equity. Conventional home loans do not require mortgage insurance with a 20% down payment. Conventional loans do require monthly mortgage insurance with less than twenty percent down payment; however, after paying down the mortgage by 22%, the lender is required to remove the monthly PMI payment.
Investor Loan: The FHA, VA, and USDA loan programs prohibit investors. The conventional mortgage does accept investors. Currently, the down payment for a single family investment home is 15%. Two to four unit investment properties require a 25% down payment.
Second Home: The FHA, VA and USDA loan programs do not permit second home financing, however, you can obtain a mortgage for a second home with a conventional mortgage. The second home mortgage usually requires a 10% minimum down payment.
Higher Loan Amount: Congress establishes the maximum loan limits for FHA, VA, USDA and conventional loan programs. The conventional loan limits are usually higher than the FHA program. There is no loan limit with the VA or USDA mortgage.
What are the benefits of a Jumbo Mortgage Loan?
Higher Purchase Limits: Jumbo mortgages can exceed the conforming loan limit, currently $417,000 in most parts of the United States.
Competitive Rates: Jumbo loan rates have reached historic lows in recent years, and the interest on loans up to one million dollars may be tax-deductible.
Second Mortgage: Many jumbo mortgage lenders may allow you to take out a second mortgage for a combined loan-to-value ratio of up to 90 percent.
What are the requirements and qualifications of a Jumbo Mortgage Loan?
- Credit history: Conventional loans are a good choice for borrowers with very good credit, which generally means a FICO score of 700 or higher.
- Financial strength: When applying for a jumbo mortgage, the maximum debt-to-income ratio for jumbo for loans is 45 percent, and the required reserve amount for jumbo loan borrowers can be as high as 20 percent of the value of the loan.
- Down payment: There is no private mortgage insurance option with a jumbo mortgage, so the required down payment will be larger – typically 20 percent.
- Property appraisal: The property appraisal must support the purchase price for the home and the mortgage the borrower wants.