Conventional Loans – Advantages & Guidelines
If you’re getting ready to buy a property, you may be considering a conventional loan. There are some advantages and a few disadvantages to this type of mortgage. Your trusted loan originator at Total Lending Concepts can go over your particular situation to see what are the best options for you. Whether you’re buying a home for your primary residence, a vacation home, or even an investment property, a conventional loan may be the way to go. One thing to know when shopping, is rates will vary depending upon occupancy, down payment, and credit. Read on to discover more about these mortgage products.
What is a Conventional Loan?
The simple answer is a conventional loan (sometimes called conforming) is not a government loan like FHA, VA, or USDA and is purchased by private investors like Fannie Mae and Freddie Mac. Over 60% of all mortgages are conventional.
Here are the highlights for this type of loan:
- This type of loan, has appealing rates
- Loan terms range from 10 years to 30 years
- Loans are available in both fixed rates and adjustable rates (ARMs)
- Down payment options range from as low as 3% which is less than FHA
- With 20% down, there’s no private mortgage insurance (PMI)
- Private mortgage insurance rates are lower than FHA’s
- Unlike FHA, once you have 20% equity, you can get rid of PMI
- Properties of 1 – 4 units are accepted
- Unique properties are easier to finance
- Condominiums and manufactured homes are simpler to finance
- Appraisal guidelines are less strict than FHA
Not only do borrowers prefer conventional loans for their primary residence, but this is also the loan of choice for a second home, vacation home, rental property, or investment property. You can get a loan for a one-to-four unit property. So if you’ve found a duplex or four-plex that you’d like to purchase and rent out, this is the loan for you.
Many borrowers with lower income take advantage of Home Ready which, only requires 3% down. So, if you want to buy a $150,000 home, you’ll only need $4,500 for a down payment.
Low Down-payment Programs
Borrowers with higher income can still get into a home with only 5% down. That means you can buy a $300,000 home with only $15000 down.
Conventional Loans vs. FHA
Private Mortgage Insurance – One of the most significant differences between a conventional loan and an FHA loan is private mortgage insurance. With this type of loan, you can get rid of the private mortgage insurance (PMI) once you have 20% equity. But, with FHA loans – that PMI is there to stay forever.
Up until a few years ago, FHA would remove their insurance, but not anymore. Plus with an FHA loan, you have to pay for up-front mortgage insurance which can add quite a bit to your closing costs. That’s why some borrowers will only consider conventional loans.
Credit Issues & Down Payment – Credit requirements are stiffer with a conventional loan. You’ll need to have a credit score of at least 620 and a 5% down payment. FHA loans are easier for a borrower to qualify for if their credit isn’t the best, or if they don’t have much saved up for a down payment.
Property Condition – some properties won’t pass an FHA appraisal since FHA has much stricter guidelines. If the property has issues – go conventional.
Interest Rates – Conventional interest rates can be higher than FHA. But remember, you also have to consider the private mortgage insurance which never drops on an FHA loan. So when comparing loan products – see what your payment would be with a conventional loan vs. an FHA.
Occupancy – property financed with conventional loans don’t have to be owner-occupied, whereas FHA has strict rules that their loans are for primary residences only. So if you want to buy a vacation home, second home, or investment property, you’ll need a conventional loan.
Hot Markets – FHA loans can take longer, and their appraisal guidelines are more stringent. So, if you’re trying to buy in a hot market – sellers may prefer a borrower with a conventional loan.
Conventional Loan Requirements
There isn’t just one type of convention loan. There are many different mortgage programs, each with their only rules and eligibility. The main requirements have to do with:
- Debt to Income (DTI) – 45% is the maximum debt to income for most conventional loans
- Credit score – minimum 620 – 640. The higher the score, the better the interest rate
- Down Payment – minimum 5% down. Much more if it’s not owner-occupied
- Occupancy – the guidelines for a primary residence, second home, or investment will vary.
Conventional Loan Interest Rates
Interest rates will vary depending upon several things. Here are a few items that make a rate higher:
- Lower credit scores
- Lower down payments
- Non-owner occupied
- Past bankruptcies
- Past foreclosures
Does a conventional loan from Total Lending Concepts sound right for you? Contact us today to take your next step.