Conventional Loan
Conventional loan is a mortgage loan that is not backed by a government. As in the earlier post we have discussed in details about the differences between Conventional Vs FHA Vs VA loans, today in this post we will cover in details about the types of conventional mortgage loan, its advantages as well disadvantages, how it works and many more. I hope this article will be helpful for you.
What Is a Conventional Mortgage or Loan?
A conventional loan is any mortgage loan or any type of home buyers’ loan that is not secured or guaranteed by the government, but instead is available through a private lender. These loans come in all shapes and sizes, and while they don’t provide some of the benefits as FHA, VA and USDA loans, conventional loans remain the most common type of mortgage loan. A conventional mortgage loan is a conforming loan, which simply means that it meets the requirements for Fannie Mae or Freddie Mac.
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How a Conventional Mortgage Works?
Conventional loans are backed by the private mortgage lenders like banks, credit union and financial institutions.
Conventional loans are broken down into conforming and no-conforming loans, depending on whether or not they conform to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), the two government-backed mortgage companies that own many mortgages in the U.S.
Below are some of the general characteristics, how conventional loans work:
- Credit Score – Good credit required. You generally need a credit score of 620, although some lenders may look for a score of 660 or better.
- Down Payment requirement – You can find conventional mortgage loans with a down payment required as low as 3%, and some lenders have special programs that offer up to 100% financing. However, if you don’t put down 20% or more, the lender typically requires you to pay private mortgage.
- Interest rates – You can get a fixed-rate loan or an adjustable-rate loan. Your interest rate will largely depend on your credit score and overall history. The better your credit score is, the less you will pay in interest over the life of the loan.
- Loan terms – Conventional loans are typically rapid over a 30-year term, but its possible to qualify for a 15- or 20-year conventional mortgage loan.
What are the Types of Conventional Loans?
There are basically two main categories of conventional loans Conforming and Non-conforming, under these two categories there are various types of conventional loans. Here are some of the most common ones:
1. Conforming loans
Conforming loans have maximum loan amounts that are set by the government. Other rules for conforming loans are set by Fannie Mae or Freddie Mac, companies that provide backing for conforming loans.
2. Non-conforming loans
Non-conforming loans are less standardized. Eligibility, pricing, and features can vary widely by lender. If conventional loans exceed FHFA loan limits or uses underwriting standards that are different from those set by Fannie Mae and Freddie Mac, it’s called a nonconforming loan.
3. Jumbo loan
A jumbo loan is a common type of nonconforming conventional loan. Jumbo loans allow you to borrow more than the maximum lending limit for conforming loan. However, they typically require a higher credit score, lower debt-to-income-ratio (DTI) and larger down payment.
4. Fixed rate conventional loans
Whether they are conforming or nonconforming, all mortgages require you to pay interest. With a fixed rate conventional loan, the interest rate stays the same for as long as you have the mortgage. Many buyers choose a 30-year fixed rate conventional loan because it usually results in an affordable monthly payment, but shorter terms are also available.
5. Adjustable-rate conventional loans
A fixed rate mortgage loan has the same interest rate and therefore, the same monthly payment throughout the life of the loan. With an adjustable-rate mortgage, however you will get a fixed interest rate for a set period, typically between three and 10 years. After that, your interest rate can adjust each year based on the current market rates. ARM rates usually adjust annually, after an initial fixed-rate period of three, five, seven or 10 years.
6. Conventional renovation loans
It can be difficult for you to find a perfect house in your budget. Buying a fixer-upper is one way to achieve home ownership when prices are high or move-in-ready inventory is low.
The Choice renovation loan and Home Style loan are two types of conventional mortgages that allow you to finance a home purchase, as well as the necessary renovations, at the same time.
Interest Rates for Conventional Mortgages
Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA and VA loans. The interest rates carried by a conventional mortgage depends on several factors, including the terms of the loans – its length, its size, and whether the interest rates is fixed interest or adjustable – as well as current economic or financial market conditions.
You can get a fixed-rate loan or an adjustable-rate loan at conventional loan. Your interest rate will largely depend on your credit score and overall credit history. The better you credit score is, the less you will have to pay in interest over the life of the loan.
Also Read: Conventional Vs FHA Vs VA loans
How to Qualify for a Conventional Loan?
To qualify for conventional loan, consumers must meet the following requirements:
1. Credit score – Consumers typically must have stellar credit reports with no significant blemishes. Consumers must have credit score of at least 620. If your credit score is 620 or higher, you will have a chance to get approved for a conforming conventional loan. And if it’s in the mid-to upper -700s, you will have a better chance of qualifying for favorable terms on your new loan.
2. Debt-to-income ratio – In addition to reviewing your credit score, lenders will look at your DTI. Lenders will see that if your Debt to income ratio is below 36% of your monthly gross income.
3. Down payment – While conventional loans don’t require a big down payment, the more money you put down, the better your chances of qualifying for a lower interest rate.
4. Research mortgage lenders – Take some time to look at different mortgages lenders, including what rates they are offering, how the application process works and whether you can do it online. Try to find at least three to five lenders you like before applying.
5. Get pre-approved – A mortgage preapproval is a letter from a mortgage lender effectively agreeing to lend you up to a certain amount of money to buy a home, as long as you meet certain conditions. During this process, the lender or broken will let you know whether you need to make other changes to improve your eligibility to buy a home.
Required Documentation
There are certain documentation required for mortgage loans, a lender will see not only if you can afford your monthly mortgage payments, which usually should not exceed 28% of your gross income. The lender will also see if you can handle a down payment on the property, along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage. The documents which are required are:
- Proof of Income.
- You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing cost on the residence, as well as cash reserves.
- Employment verification.
- Other documentation such as driving license, ID card, PAN card etc.
What are the Advantages of a Conventional Loan?
Here are some of the benefits of conventional loan:
- Low costs
- Higher loan limits, you can go even higher with jumbo conventional loans if you need to
- Conventional loans have no property restrictions
- Flexible
- Opportunity to borrow more
- Can hold numerous conventional loans
- Conventional loan can require less paperwork and can be obtained more quickly than government insured loans
- Conventional loans come in all different types and sizes
- Conventional loan also usually offers an option to pay taxes and insurance directly, without adding them to your monthly mortgage payment through an escrow account
What are the disadvantages of a Conventional Loan?
Below are some of the disadvantages of conventional loan:
- Higher credit score requirements
- Higher down payment requirements
- Stricter qualifying guidelines as it is not secured by government agency
FAQs
1. How much do I need to qualify in conventional loan?
Ans: To qualify for a conventional loan you just require a 3% down and a 620 or higher credit score.
2. What are the two categories of conventional loan?
Ans: Two categories of conventional loan are – conforming and nonconforming loans, depending on whether or not they conform to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), the two government – backed mortgage companies that own many mortgages in the U.S.
3. Does conventional loan have strict property restrictions?
Ans: No, Conventional loans have no property restrictions.
Hi, I’m Dev Kirtonia, Founder & CEO of Dev Library. A website that provides all SCERT, NCERT 3 to 12, and BA, B.com, B.Sc, and Computer Science with Post Graduate Notes & Suggestions, Novel, eBooks, Biography, Quotes, Study Materials, and more.
