Homebuyers have a lot of options to understand when looking for a mortgage. The most popular type of mortgage is a conventional loan—in fact, nearly 80 percent of home sales in the first quarter of 2022 were conventional loans. Here are a few quick facts to help you understand this type of mortgage as you get into the process. And remember—when you work with Homelend USA, you can relax—we have been doing this for years and understand how to help you work through the process to find the best mortgage for you to help you move into your dream-home with ease.
Conventional Loan Facts and Terms.
Conventional vs. Government-Backed. Conventional loans are backed by private mortgage lenders—banks and financial institutions. A government-backed loan is backed and insured by the government—these loans include FHA, VA, and USDA loans. Each of these has different qualifications and benefits to the borrower—credit score requirements, downpayment requirements, or even location eligibility. And remember, the same lenders offer government-backed loans as conventional loans—it is a matter of finding the loan that is most suitable and beneficial for you.
Conforming vs. Nonconforming. Conventional loans come in two types—conforming and nonconforming. A conforming loan follows guidelines set up by Fannie Mae and Freddie Mac, government-controlled mortgage companies who own, buy, and sell mortgages. A conforming loan meets the requirements and therefore can be bought by Fannie Mae or Freddie Mac—while this doesn’t affect the homebuyer or the terms of the loan, it does make the mortgage more appealing for the lender. This means the terms for the buyer who qualifies may be better—better interest rates, saving the buyer money over the life of the loan.
Conventional Conforming Loan Standard Requirements. The requirements for conforming loans fall into ranges, based on the amount of your downpayment and type of loan. Some basic ranges of requirements you can expect are:
- Credit score of at least 620-700
- Debt-to-income ratio lower than 36-45 percent
- Downpayment requirement can be 3 percent or even less—sometimes no downpayment is required.
- Private mortgage insurance required if you downpayment is less than 20% of home value
- Loan amount limits around $650,000—can be higher if you are in a high cost area. Jumbo loans are available if you need to borrow more.
- 15, 20, and 30 year terms
Fixed Rate vs. Adjustable Rate Loans. Your interest rate will vary depending on your financial position and credit score. You have the option of a fixed rate loan, where your interest rate stays the same for the life of your loan. With an adjustable rate mortgage (ARM), the rate changes on a set schedule. For example, a 5-1 ARM stays the same for the first 5 years and can change one time per year based on market conditions. With a 7-2 ARM, the rate is the same for 7 years and can change every 2 years based on market conditions. Typically, there is a maximum amount it can increase and a minimum total rate.
Private Mortgage Insurance. It is important to understand the fees that go along with your loan. As stated above, if your downpayment is less than 20 percent of the home value, you are required to pay private mortgage insurance (PMI). This is set based on a percentage of what you borrow and is usually paid monthly. This insurance protects the lender should the homebuyer default on the mortgage. The good news is that it isn’t a life-of-loan fee. The PMI can be removed (or is automatically removed) when you owe less than 80 percent of the home value.
When you are looking to get a mortgage, you may feel like you have a lot of new information to wade through. Homelend USA is here to help, ready to be sure you are set up with the best mortgage for your personal situation and get you ready for closing day, moving, and beyond! Let us partner with you to help you understand your options and take you through the process, making it as easy and stress-free as possible!
Contact Homelend USA today.