The term conventional loan describes any mortgage loan that is not guaranteed or insured by the Federal Government. These loans typically follow the loan limits and guidelines set forth by the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, in which case they would be referred to as conforming. Some conventional loans do not follow these guidelines and are known as non-conforming. Conventional loans typically have low closing costs and a variety of flexible payment options.
When applying for a conventional mortgage loan, lenders will consider the following criteria:
Conventional loans require slightly higher minimum down payments than loans guaranteed by some government programs. Generally, homebuyers must invest at least 5% of the home purchase price for the down payment. Homeowners who put down at least 20% of the purchase price as a down payment do not have to pay upfront for monthly mortgage insurance.
For more in-depth information, visit Lender411's Conventional Loan Requirements.
Conventional mortgage loans offer some advantages over government-insured loans:
If you are considering a conventional mortgage loan, consider the following questions to determine whether or not a conventional loan would be your best option:
While some government-insured mortgage programs do not offer much flexibility, conventional loans offer a plethora of loan options, allowing borrowers to customize the loan length, repayment plan, and other details.
Conventional loan limits differ depending on whether the loan is conforming or non-conforming. Conforming conventional loans have limits on loan amount. The current maximum amount available to borrow in most counties is $417,000 for a single family residence (this limit is higher in high cost areas). Non-conforming conventional loans, on the other hand, do not have loan limits, and borrowers can secure much larger amounts of money through these loans. In fact, by definition, jumbo loans are classified as non-conforming loans. If you are considering a home purchase that costs more than regional FHA loan limits for your area or the FHA maximum loan limit, a conventional mortgage may be a viable option.
Conventional loans require a slightly larger down payment than government-insured loan programs, generally at least 5%. However, making a larger down payment can substantially reduce interest rates and monthly payments for borrowers who can afford it. Additionally, borrowers who make a down payment of at least 20% will not be required to pay for mortgage insurance, further reducing conventional loan costs.
While government-insured loans tend to have more lenient qualifications in certain aspects, conventional loans can have more rigid borrower requirements. In addition to a stable income and employment history, conventional loans heavily consider credit history patterns when determining a borrower’s loan approval. Therefore, borrowers with low or damaged credit should consider alternatives to conventional loans.
Refinancing a Conventional Loan is a good idea when mortgage rates are low or if a homeowner needs to tap into the equity in their home for debt consolidation, home improvement or other reasons. Many homeowners also refinance to turn their adjustable rate mortgage (ARM) into a fixed-rate loan. After homeowners identify the need for which they wish to refinance, they should speak with their lender about which option will work best for them.
Be aware that borrowers don’t have to refinance with their previous lenders. Borrowers are encouraged to do research and work with the lender who provides them the best rates and is the most reputable, even if that means switching lenders. Many times, homeowners can actually get a better deal with a new lender who will be more aggressive in trying to obtain the loan than their existing lender.
Conventional mortgage guidelines allow borrowers to apply loan funds to a variety of different property types, including primary residences, second homes, and investment properties. In addition, conventional loan funds may also be used to purchase condos, townhomes, 2-4 unit properties, modular homes, manufactured homes and single-family residences.
Maximum Loan Amount: Conventional loan maximum limits vary between counties, depending on the home values within that county. The highest maximum conventional conforming loan limit is currently $729,750 in higher cost areas. The most common and lowest maximum county limit available is $417,000.
Maximum Financing: For most conventional conforming loans, the maximum financing available for a mortgage is 95% of the home’s appraised value or the selling price, whichever amount is lower. Some credit scores, property types, or combination of factors may limit this maximum loan-to-value even more.
Fixed-Rate Loans: The majority of conventional mortgages include a fixed-rate interest payment program. With a fixed-rate mortgage, the interest rate remains static and borrowers will pay the same monthly principal and interest payment for the life of the loan.
Adjustable-Rate: Conventional adjustable-rate mortgages (ARMs), while not as common as FRMs, can be tremendously beneficial for some borrowers. These mortgages begin with low initial interest rates and monthly payments. However, after a certain period, the interest rate fluctuates based upon a pre-determined index. This type of mortgage is considered more risky, since interest rates may increase, consequently increasing a borrower’s monthly mortgage payments.
Many conventional ARMs offer initial fixed-interest periods of 1, 3, 5, 7 or 10 years.
In order to be considered for a Conventional Loan, a credit score of 660 or above is recommended. A credit score is one of the biggest factors in obtaining a Conventional Loan; considering the strict credit requirements for conventional loans, a poor credit score could very well harm your chances of qualifying.
Credit score will affect your mortgage interest rates on conventional loans. Scores about 740 or above will typically get you the best rates.
The typical waiting period for receiving a Conventional Loan after a short sale can be as much as 7 years. However, this number depends directly on how big the down payment is.
The standard waiting period on a conventional loan after a foreclosure is 7 years. However, given extenuating circumstances, you may qualify for a new conventional loan as little as 36 months after a foreclosure.
Receiving a conventional loan after a credit-bruising event like bankruptcy tends to be difficult.
When searching for a conventional mortgage, always remember to set aside the appropriate amount of time to compare lenders, loan terms, and mortgage rates. Taking the time to secure the best interest rates could save you thousands of dollars over the lifetime of the loan.
Didn't find the answer you wanted? Ask one of your own.