What Are Conventional Mortgages?
Conventional mortgages are home loans that are not insured or guaranteed by the federal government. Down payments may be lower but it can be harder to qualify for a conventional loan than it is for government home loans. Once the requirements as set forth by Freddie Mac and Fannie Mae have been confirmed with, a minimum down payment of at least 3% is typically required. With a down payment of 20% or more, borrowers are exempt from paying mortgage insurance premiums are required with FHA or other government home loans.
FHA vs Conventional Home Loans
FHA Home Loans
FHA (Federal Housing Administration) loans are guaranteed by the federal government and were instituted to help make home buying more affordable for families who fall into the low- to middle-income bracket. This was achieved by relaxing lending standards, offering competitive rates, and reducing down payments to as low as 3.5%.
Other Federal Government-Backed Loans
There are two other federal backed loan programs available with similar aims:
- VA Loans guaranteed by the US Department of Veterans Affairs. These loans are only available to veterans and active military personnel and have the same benefits as FHA loans.
- USDA Loans that are guaranteed by the US Department of Agriculture. These home loans are specifically geared toward rural property buyers.
Conventional Home Loans
Conventional home mortgage borrowers typically have a more secure financial standing, can make more substantial down payments, and are considered to have a lower risk of defaulting on loan repayments. Larger down payments result in lower monthly premiums. Besides, taking into consideration the ever-increasing insurance premiums on mortgage loans with the FHA, payments on conventional mortgages that do not require private home loan insurance can be far more manageable in comparison.
Conventional mortgages are considered a higher risk by many lenders as they are not government guaranteed in the event of default. Because of this conventional mortgages have higher rates and requirements to obtain loans are much tougher to conform with. With conventional loans, borrowers have the option of canceling their mortgage insurance once the principal loan balance has dropped below 78% of the value of the home.
With FHA loans mortgage insurance premiums are charged for the duration of the loan.
Conventional Mortgage Loans
Although requirements will vary from one lender to another, the minimum score typically required for a conventional loan is 620. A more favorable mortgage rate can be obtained with a minimum score of 740 or more.
Conventional mortgage terms are usually 10years, 15 years, 20 years or 30 years.
Minimum Down Payments
Down payment requirements on conventional loans can vary significantly based on the particular lender’s requirements as well as the credit history of the borrower. The minimum down payment on a conventional loan can be considerably higher than that charged by other types of home loans. Traditionally lenders have required a minimum down payment of 20% but lately, many lenders have been offering payment programs with a minimum 3% down payment to compete with the FHA loan down payment requirements of 3.5%.
All You Need To Know About Conventional Home Loans
Basic Information About Conventional Loans
Who are they for:
Conventional mortgage loans are perfect for borrowers with good or excellent credit ratings, they offer the best rates based on great credit. The conventional loans are conforming loans using different criteria from USDA, FHA, and VA home loans. Limitations on these mortgages are at most $453,100; however, a higher dollar limit can be reached by combining the loans second lien, as long as the minimum investment is met.
How they operate:
A conventional or traditional mortgage loan is considered the “vanilla” home loan, meaning they follow conservative guidelines for minimum down payments, borrower credit ratings, and the debt-to-income ratios.
What are the benefits:
The conventional mortgage typically poses fewer challenges than the Federal Housing Administration, Veterans Affairs mortgage or US Department of Agriculture, which could take longer to process.
What are the disadvantages:
You will require a stronger credit rating to qualify for better interest rates.
Additional Information About Conventional Loans
The conventional mortgage is a type of loan guaranteed by either Freddie Mac or Fannie Mae, unlike the FHA loan that is secured by HUD or the VA loan that is guaranteed by the Veterans Administration.
Due to the mortgage loan being more flexible with several options, they have more requirements for eligibility. Several criteria must be met to determine if you qualify for the conventional home mortgage, such as a credit rating, income, financial history, the price of the property, and down payment. You will be required to provide evidence of income, and the lender will review your credit rating to identify the best loan alternative. A credit rating can tell a lender several things, including your payment background and the debt-to-income ratio. Any history of missed or late payments. With a high debt-to-income ratio, it will increase the difficulty of gaining a conventional loan approval.
The conventional home mortgage tends to offer more beneficial terms regarding lower mortgage insurance rates and costs based on a credit score. Furthermore, the conventional home loans provide an ability for borrowers to finance several properties including investment homes and second properties. The amount you wish to fund can play a role in whether you receive financing. As many mortgage companies opt to sell loans to Fannie Mae or Freddie Mac on the secondary market, they need to ensure the loan conforms to guidelines. If you are concerned about the different home loans and options available, contact us to consult with one of our local conventional mortgage loan specialists.
Even More Information About Conventional Loans
The qualifying requirements for a conventional loan and a government-backed mortgage are very different. The conventional mortgage tends to be more difficult to attain and are stricter on the qualifications. The typical down payment on a conventional loan is approximately 20 percent of the home cost, however can be a minimum of 5 percent down. If you are not able to make this down payment, there are several ways around the requirement. One option is purchasing the mortgage insurance, which is included in the monthly payment until the amount owed on the home is less than 80 percent.