Conventional loans are a widely used financing option for homebuyers with good credit and stable income seeking competitive interest rates.
What are Conventional Loans?
If you're looking to buy a home, you've probably heard the term "conventional loan" thrown around quite a bit. But what exactly is a conventional loan? Simply put, a conventional loan is a mortgage that is not insured or guaranteed by the federal government. Instead, it is backed by private lenders, such as banks and mortgage companies.
Types of Conventional Loans
There are two main types of conventional loans: conforming and non-conforming. Conforming loans adhere to the guidelines set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that purchase mortgages from lenders. Non-conforming loans, on the other hand, do not meet Fannie Mae and Freddie Mac's guidelines and are often referred to as jumbo loans.
The Benefits of a Conventional Loan
One of the main benefits of a conventional loan is that it typically offers lower interest rates than government-backed loans. Additionally, conventional loans often have more flexible terms, such as adjustable interest rates and shorter loan lengths. Another benefit is that there is no upfront mortgage insurance premium, unlike with FHA loans.
Conventional vs. Government-Backed Loans
While conventional loans are backed by private lenders, government-backed loans are insured or guaranteed by federal agencies, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Government-backed loans often have less strict credit requirements and lower down payment options, but they also come with higher fees and mortgage insurance premiums.
How to Qualify for a Conventional Loan
To qualify for a conventional loan, you will need to meet certain eligibility requirements, such as having a good credit score and a steady income. You will also need to provide documentation of your assets and liabilities, such as bank statements and tax returns.
Credit Score Requirements for Conventional Loans
Most lenders require a credit score of at least 620 to qualify for a conventional loan. However, a higher credit score can help you qualify for a lower interest rate and a larger loan amount.
Debt-to-Income Ratio and Other Eligibility Factors
In addition to your credit score, lenders will also consider your debt-to-income ratio (DTI) when determining your eligibility for a conventional loan. This is the percentage of your monthly income that goes toward paying off debts, such as credit card bills and car loans. Typically, lenders prefer a DTI of 36% or lower.
Other factors that lenders may consider include your employment history, savings and assets, and the amount of your down payment.
Conventional Loan Limits: How Much Can You Borrow?
The amount you can borrow with a conventional loan depends on several factors, including your credit score, income, and the location of the property you are purchasing. In general, conforming loans have a maximum loan limit of $548,250, while non-conforming loans can go much higher.
Down Payment Options for Conventional Loans
One of the biggest misconceptions about conventional loans is that you need a large down payment to qualify. While it's true that a larger down payment can help you avoid PMI, many lenders offer conventional loans with down payments as low as 3%.
Understanding Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is a type of insurance that protects lenders in case you default on your loan. If you put down less than 20% on your home purchase, you will typically be required to pay PMI. This can add hundreds of dollars to your monthly mortgage payment.
Calculating Your PMI: Rates, Fees, and Guidelines
PMI rates can vary depending on your credit score, down payment amount, and other factors. However, most PMI rates range from 0.3% to 1.5% of the total loan amount per year. There may also be upfront fees and monthly premiums associated with PMI.
Tips for Reducing or Eliminating PMI
There are several ways to reduce or eliminate PMI, including putting down a larger down payment, getting a piggyback loan, or requesting that your lender remove the PMI once you have paid down a certain amount of your loan.
Closing Costs for Conventional Loans: What to Expect
Closing costs for a conventional loan can range from 2% to 5% of the purchase price of the home. These costs can include fees for the appraisal, title search, and attorney fees.
Conclusion: Why Conventional Loans are the Best Choice for Homebuyers
While government-backed loans can be a good option for some homebuyers, conventional loans offer more flexibility and lower interest rates. With a little bit of research and preparation, you can qualify for a conventional loan that meets your needs and helps you achieve your dream of homeownership.
If you're ready to take the first step towards buying a home, contact Mortgage Brokers Pro today. Our team of experienced mortgage professionals can