One of the most common types of loans that home buyers come across is the conventional loan. These loans aren’t backed by the government, like FHA and VA loans. Conventional loans follow the guidelines that Fannie Mae and Freddie Mac - two agencies responsible for standardizing mortgage lending - have set. But it’s lenders, such as banks, that are responsible for approving your conventional loan.
Types of Conventional Loans
Adjustable-rate conventional loans have an interest rate that can fluctuate with economic changes. Many of these loans have a fixed rate for a certain length of time, then revert to an adjustable-rate for the remainder of the loan period. For example, a 5/1 adjustable-rate mortgage (ARM) would fix the rate for the first five years, then switch to an adjustable rate. When it reaches the adjustment period, the rate changes could happen monthly, quarterly, at six-month intervals, or annually. In most cases, these loans are attractive as the initial fixed interest rate portion is lower than with other conventional loans options.
Amortized conventional loans are either funded by banks, credit unions, savings and loans, or online mortgage lenders. The loan-to-value (LTV) ratio indicates how much the loan is versus the property value. For example, a house that is appraised for $200,000 and has a $175,000 loan would have an LTV of 87.5%. The loaned amount plus interest is amortized over the loan term, to ensure consistent payments each month. This is a preferable option for those who want certainty in their monthly payments.
Conventional portfolio loans are a subset of loans that are held directly by mortgage lenders, in contrast to other types of conventional loans, which are usually sold to investors. In the case of portfolio loans, the lender has more flexibility to set their guidelines. This can make it easier at times for borrowers to qualify for a loan.
Advantages of a Conventional Mortgage
While conventional loans aren’t backed by a government entity and typically have larger down payment requirements than VA and FHA loans, they are still the most popular type of mortgage loan. Interest rates tend to be lower since you’re more likely to be a more qualified buyer, and processing times are usually faster so you can close on an expedited timeline.
Qualifying for a Loan
Requirements for a conventional loan may vary between different lenders. In general, a credit score of 620 is needed and a higher credit score may be required to secure a lower interest rate. Down payment requirements can be affected by both the lender’s policies and your credit history. They can require as much as 20%, to as little as 3%. This lower 3% requirement was recently created to compete with FHA loans.
If you’re not putting down a deposit of at least 20%, your lender will most likely require you to pay for private mortgage insurance (PMI). This insurance is paid every month and provides coverage to your lender for a part of the loan’s balance if you default on the loan. Once you have paid at least 80% of the principal balance of either the original appraised value or the current value of your home, you may be able to cancel PMI payments. You might have to show that you’ve been timely with your payments or meet other requirements to cancel PMI. Some loan programs, such as certain FHA programs, continue to require PMI at LTVs lower than 80%.
Buying a house is one of the most significant investments a person will make in their life. Your financial future is at stake, so it's essential that you know all of your options. Our mortgage professionals are experts in the industry and can help you make the best decision for your family. Call us at 855-465-0753, or visit us here to get help on financing your home.