CONVENTIONAL MORTGAGE LOAN
A conventional mortgage loan refers to any loan that is not offered, insured, or guaranteed by the federal government (commonly referred to a federally backed loans). Loans that are NOT conventional loans would be Federal Housing Administration (FHA), U.S. Department of Veteran Affairs (VA) and U.S. Department of Agriculture (USDA) loans. Conventional loans are typically guaranteed by one of two government sponsored entities, either Fannie Mae (FNMA) or Freddie Mac (FHLMC). Conventional loans are actually the most common in the mortgage industry. Conventional mortgages typically have a slightly higher down payment than government loans; however, it often provides more flexibility with fewer restrictions.
Conventional Loan Pros & Cons
On the plus side, a conventional loan provides these benefits:
- Down payments now as low as 3%
- No mortgage insurance required if putting down 20%+
- Mortgage Insurance can be canceled with investor approval
- Can be used to buy 2nd homes and investment properties
On the other hand, conventional loans also have a few more qualification requirements:
- Higher rates for borrowers with lower credit scores
- Income limits defining whether you are considered “conforming” vs “jumbo”
- Credit guidelines are more strict than on government loans
- Required “Reserves” or cash after closing will need to be verified
Conventional Loan Programs
An adjustable-rate mortgage (ARM) is a loan term option with interest rates that can change periodically after the initial fixed-rate period. After this introductory period, monthly payments are susceptible to increases or decreases based on market fluctuations, which can also affect the monthly payment. An ARM could be the right choice for you if you plan on staying in your home for just a few years, you’re expecting a future pay increase, or the current interest rate on a fixed-rate mortgage is too high
Fixed-rate mortgages protect you against rising rates since the interest rate remains the same for the entire term of the loan. Plus, you have the option of selecting a 10, 15, 20, 25 or 30-year term. The main difference is the lower term options have higher monthly payments, which also means you are building home equity faster. Keep in mind you can use equity as a down payment for your next home or a future cash-out refinance. If you plan on staying in your home for a longer time frame, a fixed-rate mortgage could be the right solution for you.
A jumbo loan, or non-conforming mortgage, allows you to purchase more expensive homes with a loan amount above the conforming limit set by the Federal Housing Finance Agency. In most areas of the country, the conventional conforming loan limit is $510,400; however, the limit is $1,089,300 in higher cost areas. If you have a low debt-to-income (DTI) ratio and a higher credit score, but you don’t have enough funds to bring the loan amount under the conforming limit, a jumbo loan might be the right option for you.
Let a member of the LifetimeLender Team help you determine which type of loan is best for you. Contact us today!