Conventional Loans
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What is a Conventional Home Loan?
A conventional home loan is a mortgage that is not insured, or guaranteed, by the federal government. They’re popular with borrowers who have good credit, a stable job and income, who can afford a down payment, and people who are financially stable overall.
Government-backed loans like the VA, FHA, USDA and other loan programs are designed for people who can’t afford a significant down payment, have less than perfect credit, are first-time homebuyers, and others who may need some type of financing assistance.
With a conventional loan, we set the terms of the loan and works with the borrower directly. In this situation, We have determined the borrower has the ability to make all their payments on time, and will not default on the loan. Government-backed loans, on the other hand, have terms set by the federal government who then insures or guarantees the loan, protecting the lender in the event a borrower defaults on the mortgage.
Conventional Home Loan Advantages
Conventional home loans are available for new home purchases and refinancing. They can sometimes be harder to qualify for because of additional credit and financial requirements. However, you‘ll generally find they offer much more flexible terms and fewer restrictions than government-backed loans. Advantages of conventional loans include:
You have a lot more options to choose from, the terms are more flexible and easier to customize and match to your financial situation and goals.
They can be used for almost all types of properties, from single- and multi-family homes to condominiums and even manufactured homes.
If you have at least 20% to put down on a purchase, or at least 20% equity when refinancing, you are not required to pay mortgage insurance.
Conventional loan rates are often quite low since we know borrower is financially stable and has good credit.
Types of Conventional Loans
There are two types of conventional loans: fixed-rate and adjustable rate mortgages.
Fixed-rate loans have an interest rate that does not change for the life of loan. 15- and 30-year terms are the most common. They offer stable, predictable payments that also don’t change. Monthly payments usually very low because they’re spread out over time. They’re great long-term loans if you plan to stay in your house for at least seven or more years.
Adjustable rate mortgages have an interest rate that does change. There’s an initial up-front period when the rate is fixed. During this time, the interest rate and monthly payments are even lower than a fixed-rate mortgage. However, after the initial period, your rate can change or adjust, usually higher, along with your monthly payments. Adjustable rates are ideal for people who don’t plan on staying in their home past the time when the interest rate will change, usually after 3-, 5-, 7- or 10-year terms.
What Are Rates For A Conventional Mortgage?
Interest rates for conventional mortgages change daily. Conventional mortgage interest rates are usually slightly lower than FHA loan interest rates and slightly higher than VA loan interest rates. However, the actual interest rate you get will be based on your personal situation.
While many sites can give you estimated conventional loan interest rates, the best way to see your actual interest rate for a mortgage is to apply. When you apply with Parish Lending, you’ll be able to see your real interest rate and payment without any commitment.
Conventional Mortgage Requirements
Down Payment
It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%; however, the down payment requirement can vary based on your personal situation and the type of loan or property you’re getting:
If you’re not a first-time home buyer, the down payment requirement is 5%.
If the home you’re buying is not a single-family home (i.e., it has more than one unit), you may need to put down 15%.
If you’re buying a second home, you’ll need to put at least 10% down.
If you’re getting an adjustable rate mortgage, the down payment requirement is 5%.
If you’re getting a jumbo loan, the down payment requirement ranges from 10% to 40%.
If you’re refinancing, you’ll need more than 3% equity to refinance. In all cases, you’ll need at least 5% equity. If you’re doing a cash-out refinance, you’ll need to leave at least 20% equity in the home.
A mortgage calculator can help you figure out how your down payment amount will affect your future monthly payments.
Private Mortgage Insurance
If you put down less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI). PMI protects your lender in case you default on your loan. The cost for PMI varies based on your loan type, your credit score, and the size of your down payment.
PMI is usually paid as part of your monthly mortgage payment, but there are other ways to cover the cost as well. Some buyers pay it as an upfront fee. Others pay it in the form of a slightly higher interest rate. Choosing how to pay for PMI is a matter of running the numbers to figure out which option is cheapest for you.
The nice thing about PMI is that it won’t be part of your loan forever – that is, you won’t have to refinance to get rid of it. When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments. If you reach 20% equity as a result of your home increasing in value, you can contact your lender for a new appraisal so they can use the new value to recalculate your PMI requirement.
Once you reach 22% equity in the home, your lender will automatically remove PMI from your loan.
Other Requirements
Credit score: In most cases, you’ll need a credit score of at least 620 to qualify for a conventional loan.
Debt-to-income ratio: Your debt-to-income ratio (DTI) is a percentage that represents how much of your monthly income goes to pay off debts. You can calculate your DTI by adding up the minimum monthly payments on all your debts (like student loans, auto loans and credit cards) and dividing it by your gross monthly income. For most conventional loans, your DTI must be 50% or lower.
Loan size: For a conforming conventional loan, your loan must fall within the loan limits set by Fannie Mae and Freddie Mac. The loan limit changes annually; 2019’s loan limit is $484,350. To see loan limits for your area, visit the Federal Housing Finance Agency website.
Summary
Conventional loans generally offer lower costs than other loan types, and if you meet credit score requirements and have a down payment of at least 3%, a conventional mortgage might be the best solution for you. Parish Lending can help you decide if this is the best fit for your situation.