Conventional loans boast great rates, lower costs, and home buying flexibility.
Buying a home is perhaps the largest investment you’ll make in your lifetime, so it’s important to choose the right mortgage from the start. You have several types of loans to choose from, including a conventional mortgage, and each has a different set of requirements.
The Facts About Conventional Loans:
What Are Conventional Loans?
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.Learn More
Conventional loan processing tends to be more streamlined since the borrower deals directly with the lender and isn’t dependent on government approvals. As a result, conventional loan applications typically have shorter and less complicated approval processes.
Compare Lender Fees
Conventional loans are offered through private lenders and the fees are not set by the government. This means the fees can vary widely among lenders — not necessarily a bad thing since you might save money.
It’s more likely that you can avoid mortgage insurance premiums (MIPs) with conventional loans than with government insured loans, largely because conventional loans require higher down payments.
Lower Interest Rates
Private lenders may compete for your business if you are deemed a good credit risk because of income, credit score and other factors. Because of this, you may be able obtain a more attractive interest rate.
Check Your Eligibility for a Conventional Loan
Many potential homeowners find a conventional loan attractive because it doesn't require an upfront mortgage insurance payment making your overall loan balance lower and resulting in a lower monthly payment.
Be prepared to provide up-to-date, accurate documents that prove your financial stability. These include recent pay stubs, W-2 forms and tax returns from the current and previous year.
Boost your credit score by paying bills on time or early and reducing your debt.
Decrease your housing ratio, one of the two debt-to-income ratios that lenders consider during the mortgage application process.
Decrease your total debt-to-income ratio. Most lenders favor borrowers with a lower debt-to-income ration.
Accumulate a substantial down payment of at least 20% for your home.
Buy a home that you can afford. You don’t want to be in a mortgage that creates financial instability.
Be selective of where you purchase your new home. Resale value is important and many areas offer other incentives like being USDA eligible.
Get pre-approved! This helps you understand where you stand financially and what you can afford.
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 monthly mortgage insurance payment. The monthly mortgage insurance never goes away… even with a 20% down payment or equivalent equity. 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.
Conventional home loans do not require mortgage insurance with a 20% down payment.
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.
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.