WHAT ARE CONVENTIONAL LOANS?
Conventional mortgages are homebuyer loans not provided or guaranteed by the government. Banks and credit unions offer conventional mortgages.
Conventional loans are non-government-backed mortgages. Traditional loans include both conforming and non-conforming loans.
Conventional conforming mortgages are governed by Fannie Mae and Freddie Mac (Freddie Mac). Some lenders may allow for non-conforming conventional loans.
In the first quarter of 2018, conventional loans outpaced government-backed loans. They financed 74% of all new home sales.
While conventional loans are more flexible, they are riskier and harder to get since the federal government does not insure them.
Conventional loans can be applied for using a variety of factors. However, conventional loans have higher credit requirements than FHA or government-backed loans. A 620 credit score and a debt-to-income ratio of 50% or less is ideal.
Conventional loans are also known as conforming loans or mortgages. While they have certain characteristics, they are two separate types. Conforming mortgages fulfill Fannie Mae or Freddie Mac’s funding criteria. The Federal Housing Finance Agency (FHFA) sets the annual dollar limit; in 2021, a loan cannot exceed $548,250.
All conforming loans are called conforming loans. But not all conventional loans are. For example, a $500,000 jumbo mortgage is conventional but not conforming since it exceeds Fannie Mae’s and Freddie Mac’s support limit.
In 2020, 8.3 million houses will have FHA loans. The secondary market for conventional mortgages is large and liquid. Conventional mortgages are packaged into a pass-through mortgage-backed product traded in the mortgage To Be Announced forward market (TBA). Many common pass-through instruments can be securitized as CMOS.
HOW ARE CONVENTIONAL LOANS APPROVED?
Conventional mortgages usually have a fixed interest rate, which will not change over the loan term. This means that banks and creditors must comply with stricter lending requirements.
The FHA, VA, and USDA Rural Housing Service can assist banks in obtaining mortgages. These programs only accept borrowers who fulfill certain conditions.
Banks, credit unions, and other financial institutions originate and service conventional loans. Many institutions also provide government-backed loans. Conventional loans do not always offer the same advantages as government-backed loans. There is no down payment or mortgage insurance required.
A conforming conventional loan accepts credit scores as low as 620. Some lenders, however, need a 660 credit score. Your credit score and history will affect your interest rate.
Your credit score and history will determine how much interest you pay during the loan’s life. Conventional mortgages demand as little as 3% down, while some lenders provide 100% financing. If you don’t put 20% down, lenders will usually require you to pay private mortgage insurance, ranging from 0.3 to 1.5 percent annually.
Conventional mortgages are normally for 30 years but can be for 15 or 20 years.
Since the 2007 subprime mortgage meltdown, lenders have tightened their lending standards. While “no verification” and “no deposit” mortgages have grown in popularity, the basic criteria have not. To apply for a mortgage, borrowers must complete an official application and pay a fee. Next, the lender will request documents for a full credit check, including the applicant’s credit history, score, and background.
TYPES OF CONVENTIONAL LOANS:
Conforming Conventional Loans: These loans meet the standards of Fannie Mae or Freddie Mac. Amount up to the loan’s limit. The maximum loan amount for a single-family home in 2019 is $484 350. High-cost region borrowers can borrow up to $726,525.
If you need a loan amount that exceeds the conforming lending limit, look for jumbo lenders. Jumbo loans require a higher credit score (700+). You may also need a lower DTI and bigger down payment. Despite these advantages, a conforming loan may have a higher interest rate than a conventional loan due to the lender’s greater risk.
These are loans that a lender keeps in its portfolio rather than sells on the secondary market. But they must meet Fannie Mae and Freddie Mae standards. Portfolio loans provide lenders more leeway in underwriting, helping borrowers with bad credit or a high debt-to-income ratio. Portfolio loans are more costly and do not safeguard consumers as well.
Conforming Subprime Loans: A debt-to-income ratio of less than 50% and a credit score of at least 620 are required for a conforming loan. If you have bad credit, you may be eligible for a subprime loan. These loans may be non-conforming, with high-interest rates and costs. A mortgage without waiting for credit to improve may be possible with these loans.
Conventional loans fully amortized Homebuyers must make a monthly payment at the start and end of the loan term. Conventional loans can be amortized at fixed or adjustable rates.
Fixed-rate mortgage loans have the same interest rate and hence the same monthly payments for the life of the loan. It has a fixed interest rate for a set time, usually between three and 10 years. The lender makes an annual interest rate adjustment. Contrary to popular belief, adjustable-rate conventional loans have lower interest rates than fixed-rate conventional loans.
THESE ARE THE DIFFERENCES BETWEEN CONVENTIONAL, FHA, GOVERNMENT-BACKED, AND USDA LOANS:
Due to their unique features, government-insured mortgage loans may appeal to individual homeowners. Let’s examine each option and see who could be interested.
You can get an FHA loan with a 500 credit score or 580 with a 3.5 percent down payment. If your credit score is too low for a typical loan, this may be an option. The Federal Housing Administration guarantees FHA loans and allows credit scores as low as 580. Conventional loans require a 3% down payment and a credit score of 620 to qualify.
When deciding between an FHA and a conventional loan, the cost of mortgage insurance must be considered. With an FHA loan, you must pay premium mortgage insurance if you put less than 10% down, regardless of the value of your home. A conventional loan with 20% equity will not need you to pay private mortgage insurance.
VA loans are government-backed loans for service personnel, their spouses, and dependents. VA loans must meet the same standards as regular loans. However, VA loans have a few extra benefits. First, VA loans do not need a down payment or mortgage insurance.
USDA loans: These USDA-insured loans can help low- or moderate-income homebuyers acquire a rural property. These loans need no down payment and are credit score flexible. While conventional loans do not have a maximum income limit, USDA loans do, depending on your region and state. USDA loan eligibility is determined by the total incomes of all family members, not just the borrowers.
USDA loans do not need PMI but do require a guaranteed fee equal to PMI. The total upfront cost is 1% of the total loan amount. Guarantee costs are generally less than PMI and can be included in monthly payments.
CONVENTIONAL LOAN INTEREST RATES:
In general, conventional loans have higher interest rates. Those who take out these loans must pay mortgage insurance.
Several variables determine standard mortgage rates. Factors to consider include the loan’s term and size and current economic and financial market conditions.
Mortgage lenders’ forecasts of future inflation set rates. The demand and supply of mortgage-backed securities also influence rates.
The Fed raises the federal funds rate, increasing borrowing rates. Banks then charge their customers more. Mortgage rates and other consumer lending rates generally rise.
A broker’s (or lender’s) points or fees are usually linked to interest rates. Paying more points lowers your interest rate. A point is 1% of the loan amount. It usually reduces your interest rate by 0.25 percent.
Last, the borrower’s financial situation influences the interest rate: assets, creditworthiness, and the amount of down payment they can afford.
If borrowers plan to live in a home for more than 10 years, they might consider buying points to lock in lower interest rates.
PERSONAL MORTGAGE INSURANCE:
If your down payment is less than 20%, you will need private mortgage insurance (PMI). PMI protects the lender in case of default. It varies by loan type, credit score, and down payment.
PMI is usually included in your mortgage payment. But there are other options. Some buyers pay it with a higher interest rate, while others pay it in full. With PMI, you may choose the payment plan that best suits your needs.
PMI does not stay on your loan forever. You don’t need to refinance to get rid of it. Once you have 20% equity in your house, you can ask your lender to stop charging PMI. Your lender may request a new assessment after you achieve 20% equity in your home. Your lender will automatically remove PMI from your loan after you reach 22% equity.
THE BENEFITS AND DISADVANTAGES OF CONVENTIONAL LOANS:
Convenience is a big draw for conventional loans:
Rapid loan processing
Options for down payments start at 3% of the purchase price.
A fixed-rate mortgage is available in several terms. Their ages range from 10 to thirty.
Reduced PMI (PMI)
While traditional loans are flexible, you must still make decisions. Determine your down payment, loan duration, and maximum purchase price.
Among the drawbacks of conventional loans are:
A typical loan requires a credit score of 620. Credit scores as low as 500 may qualify for an FHA loan. USDA loans need a credit score of 580.
Decreased Minimum Down Payment Requirement: VA loans’ minimum down payment requirement has been increased to 3%. A bigger down payment is required to qualify for a lower interest rate or eliminate PMI.
Government-backed mortgages reduce lender risk. If you meet the criteria, you may be able to get one faster than a regular loan. On the other hand, a traditional loan may need you to carefully assess your financial situation, as the lender is taking a bigger risk.
ELIGIBILITY FOR STANDARD LOANS:
No lender can finance 100% of a property and determine if you can make the monthly mortgage payments (which should not exceed 28 percent of your income).
A thirty-day pay stub showing income and profits for the year, two years of federal tax returns, sixty-day or quarterly reports on all assets, including savings and bank accounts, and two years of W-2 statements. Debtors must also be prepared to show proof of additional income, such as alimony and bonuses.
Bank and investment account paperwork will be required to show you have enough money for the down payment and closing costs. Gift letters are required if a family or friend contributes to your down payment. These letters will state that they are not loans and may require notarization.
Employer verification: Lenders increasingly demand to see borrowers’ work history. Lenders may also call your workplace to verify your job and income. For recent job changes, lenders may contact previous employers. Self-employed borrowers may need to provide additional documentation.
To get your credit report, your lender will require your driver’s license or state ID.
Generally, those just starting, have a lot of debt, or have bad credit have difficulty acquiring traditional loans. These mortgages are difficult for people with:
Not acceptable are recent bankruptcy or foreclosure, credit scores below 650, DTIs above 43%, and down payments of less than 20%, or even 10%, of the purchase price.
If you are denied a mortgage, get a written notice. You may be eligible for other mortgage assistance programs.
You may be eligible for an FHA loan if you have bad credit and are a first-time buyer. For example, FHA loans are designed for first-time buyers and have higher credit requirements.
TIPS FOR GETTING A CONVENTIONAL LOAN:
Keep an eye on your credit score: Before applying for any loan. A conforming conventional loan requires a credit score of 620 or higher. Your credit score should be in the mid-to-upper 700s to qualify for a conforming conventional loan.
Paying your bills on time, paying off credit card debt, and avoiding unnecessary borrowing will help you improve your credit score. Get a free copy of your credit report to help you discover areas that need more attention. Credit rehabilitation takes time but may save you hundreds of dollars over the loan’s term.
Even if you have gone bankrupt, you may get a conventional loan. You can get a conventional mortgage two years after finishing a Chapter 13 repayment plan. A four-year delay is required for Chapter 7.
You’ll get a letter from a mortgage lender confirming their readiness to lend you money. This is not a mortgage application; however, financial documentation such as tax returns, payslips, investment account statements, and bank records will be requested. It also involves a credit check. Preapproval letters may help you make an offer on the house. They are usually good for 60-90 days, allowing you plenty of time to choose a home. Before approving your mortgage application, the lender will check your credit and financial situation.
Prepare a down payment: While traditional loans seldom need substantial down payments, higher down payments enhance your chances of getting a better interest rate. Some lenders need as little as 3% down, while others provide 100% financing. Save enough to cover at least 20% of the cost of private mortgage insurance.
Check your debt-to-income ratio:
When evaluating your debt-to-income ratio, lenders will look at your credit ratings as well as your debt-to-income ratio. Lenders prefer to see monthly liabilities under 36% of income. Lenders may extend the DTI limit to 43 percent if you have good credit, considerable cash, or a 20% down payment. Fannie Mae and Freddie Mac allow conforming loans up to 50% LTV.
Commit to a 10% down payment: A 20% down payment eliminates PMI. Larger down payment lowers monthly payments and increases equity.
Why keep a 15-year fixed-rate mortgage? 15-year mortgages have higher monthly payments but lower interest rates than 30-year mortgages. Fixed-rate mortgages outperform adjustable-rate mortgages. It is set for the loan term.
Mortgage payments should not exceed 25% of take-home pay: This is our final phase. Buying a home within your means might help you save for retirement and college.
Contact Todd Uzzell, our Mortgage Loan Officer, now! Get the tailored, thorough mortgage advice you need. Our business is dedicated to helping customers achieve their goals. We can help you refinance or buy a property.
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