Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Conventional Mortgage Loan
Many homeowners opt for a conventional mortgage loan, which is a great choice because they offer lower costs compared to other popular loan types.
If you have a credit score that is high enough and a big down payment, then a conventional mortgage could be the right choice for you.
What is a Conventional Mortgage?
A conventional mortgage is a mortgage that is not guaranteed or insured by the federal government.
A most conventional mortgage, which meets the requirements to be sold to Fannie Mae or Freddie Mac is called a conforming loan.
Fannie Mae and Freddie Mac, which are government-sponsored enterprises purchase mortgages from lenders and sell them to investors.
Thus freeing up the lenders’ funds so they can get more qualified buyers into homes.
Conventional mortgages that don’t meet Fannie Mae’s or Freddie Mac’s guidelines can be non-conforming. A jumbo loan, which is a mortgage that exceeds the conforming loan limit, is one type of non-conforming conventional mortgage.
There’s no single set of requirements for borrowers for conventional loans, as there are several different sets of guidelines under it.
In comparison to government-backed loans like FHA loans, conventional loans generally have stricter credit requirements.
With most conventional loans, a borrower would need a credit score of a minimum of 620 and a debt to income ratio of 50% or less.
Conventional Loan Requirements
Down payment
A first time home buyers can get a conventional mortgage with a down payment that is as low as 3% but depending on the borrower’s personal situation and the type of loan or property they are getting the down payment requirement will vary
- If one is not a first-time homebuyer or not making more than 80% of the median income of their area, then the requirement for a down payment is 5%.
- If the home they are buying has more than one unit then they may need to put down 15%.
- If it for the purchase of a second home, one needs to put at least 10% down.
- For an adjustable-rate mortgage, the down payment requirement is 5%.
- For getting a jumbo loan the down payment requirement could range from 20% to 40%.
If the borrower has more than 3% equity then it is possible for them to refinance. He needs a minimum of 5% equity in all cases.
If they want to do a cash-out refinance, they need a minimum of 20% equity in the home.
Depending on the loan amount a borrower needs 10.01% – 25% equity when they are refinancing a jumbo loan.
To figure out how the down payment amount will affect the future monthly payments the ideal choice is a mortgage calculator.
Private Mortgage Insurance
If less than 20% is put down on a conventional loan, the borrower is required to pay private mortgage insurance (PMI).
In case of default on the loan then a PMI protects the lender. Depending on the type of loan, the credit score, and the size of a down payment the cost for PMI would vary.
As part of the monthly mortgage payment a PMI is paid, but there are also other ways to cover the cost.
Some buyers can pay it as an upfront fee, while others can pay it at a slightly higher interest rate.
One can choose how to pay for PMI by figuring out which option is cheapest for them.
To get rid of PMI the borrower doesn’t need to refinance hence it need not be a part of one’s loan forever.
When the equity in the home reaches 20% on the regular mortgage payment schedule, the homeowner can ask their lender to remove the PMI from their mortgage payments.
If because the home increases in value the borrower reaches 20% equity they can contact their lender for a new appraisal so they can use the new value to recalculate the PMI requirement.
Once they reach 22% equity in the home, the lender will automatically remove PMI from the loan.
Credit Score
In most cases, a credit score of at least 620 is needed to qualify for a conventional loan
Debt-to-Income Ratio
A debt-to-income ratio (DTI) is a percentage representing how much of a monthly income goes to pay off debts.
This can be calculated by adding up the minimum monthly payments on all the debts including student loans, auto loans, and credit card loans, and then dividing it by the borrower’s gross monthly income.
For most conventional loans, the DTI must be 50% or lower.
Loan Size
For a conforming conventional loan, the loan must be in association with the loan limits set by Fannie Mae and Freddie Mac.
Which changes annually. The limit in 2020 was $510,400, and in 2021, it’s $548,250. But Alaska, Hawaii, and other high-cost areas in the U.S. have higher loan limits that range up to $822,375.
The Federal Housing Finance Agency website can assist to see loan limits for your area.
Conclusion
Compared to FHA loan interest rates the conventional mortgage interest rates are usually lower and they are slightly higher than VA loan interest rates.
But depending on your personal situation the actual interest rate will change.
If you meet credit score requirements and have a down payment of a minimum of 3%, then you can take advantage of the lower-cost offers a conventional mortgage provides you.
