Purchasing a home is arguably one of the most expensive and significant decisions of your life.
With so many different types of loans to choose from, it can be difficult to know where to begin the process of securing financing.
There are several great options when it comes to mortgage financing, and one of the most commonly used loan options is a conventional loan.
If you are still searching for the right loan option, you may have questions regarding conventional loans. After all, a mortgage is typically a 30-year commitment.
As such, it is important to do your research before settling on a specific loan type.
Read on to learn more about conventional loans, so you can determine if this form of financing could be right for you.
What Is a Conventional Loan?
A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government.
It is generally a fixed-rate loan, meaning the interest rate remains the same throughout the life of the loan.
Conventional loans are typically available in various terms and maturities, such as 15-year, 20-year, and 30-year terms.
Those loans are considered to be “conforming loans” which basically means they must be up to Fannie Mae and Freddie Mac standards.
The amount of money you borrow for a conventional loan is typically referred to as the “principal” and it includes both the amount of money you are borrowing as well as any fees or closing costs associated with the loan.
These loans are a great choice for a variety of people, especially those with good credit and a healthy down payment.
While conventional loans won’t be for everyone, they remain one of the most popular loan options for homebuyers.
Do Conventional Loans Require Private Mortgage Insurance (PMI)?
Yes, conventional loans will typically require private mortgage insurance (PMI).
However, if the borrower is able to put down 20% or more of the total purchase price, PMI is no longer required.
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Basically, PMI is an insurance policy that protects the lender in the event of default, and it must be paid for by the borrower.
The amount of PMI required varies depending on factors such as credit score, loan-to-value ratio, and type of loan.
Is A Down Payment Required for Conventional Loans?
Yes, a down payment is typically required when taking out a conventional loan.
The down payment amount varies depending on factors such as credit score, loan-to-value ratio, property type, and other criteria.
Generally speaking, the minimum down payment for these loans is around 3%, but this can vary depending on the lender.
Thus, for the most accurate information, always reach out to your lender.
What Are the Minimum Credit Score Requirements?
Your credit score is an important factor when it comes to qualifying for a conventional loan.
Most lenders require you to have a minimum credit score of 620 in order to qualify for this type of loan.
However, some lenders may require a higher credit score depending on the borrower’s debt-to-income ratio and other factors.
If you have a lower score, there are still options available such as FHA loans and other types of government-backed loans.
What Criteria Must I Meet to Qualify for A Conventional Loan?
In order to qualify for a conventional loan, borrowers must be able to meet certain financial criteria.
As such, lenders will look at your credit score, income, and debt-to-income ratio.
They will also consider the amount of money you have for a down payment and closing costs, as well as any existing assets or savings you may have.
Most lenders require additional documentation, such as proof of employment, tax returns for the past two years, and other financial documents in order to verify your income and assets.
Do Conventional Loans Have Conforming Loan Limits?
Yes, conventional loans have conforming loan limits.
These limits vary from one year to the next and are based on the median home prices in each particular area.
For example, in 2021, if the conforming loan limit in your area for a single-family residence was $548,250, then your loan amount could not exceed this threshold in order to be financed with a conventional loan.
It’s important to note that the conforming loan limit does not include any fees or closing costs associated with the loan.
Are There Any Benefits to Choosing A Conventional Loan?
There are many convincing reasons to consider choosing a conventional loan for your next mortgage. Consider them below:
1.) Option To Put Less Than 20% Down
Conventional loans make home ownership attainable to more people since there is an option to put down less than 20%.
As a matter of fact, some home buyers are able to purchase a home, with a conventional loan, putting down as little as 3%.
However, it is important to take note that if you choose this option and put less than 20% down, you will be required to purchase private mortgage insurance for the duration of the loan.
2.) Lower Interest Rates
Conventional loans can offer competitive interest rates, with some lenders offering rates as low as 3.5%.
3.) Flexible Terms
Conventional loans are available in various terms, such as 15-year, 20-year, and 30-year terms. Thus, you can choose the term that best suits your needs and budget.
4.) Potential For Lower Fees
Conventional loans often come with fewer fees than other loan types, such as FHA loans.
5.) Opportunity For Refinancing
If your circumstances change, you may be able to refinance your conventional loan to get a lower interest rate or more favorable repayment terms.
While other loans, such as VA loans cater to a very specific demographic, conventional loans are open to all who meet the financial requirements for qualification.
7.) Faster and Easier
Conventional loans also offer a faster and easier application process than other loan types.
These loans don’t require nearly as much paperwork as loans back by the government.
Not to mention, the requirements are less stringent than government-backed loans that require appraisal and inspections to be completed prior to receiving funding.
Thus, this allows the entire process to be completed more quickly.
What Kinds of Properties Can I Purchase with A Conventional Loan?
A conventional loan can be used for a variety of property types, including single-family residences, duplexes, triplexes, fourplexes, condominiums, and townhouses.
In addition to these residential properties, you may also be able to use a conventional loan to purchase raw land or a manufactured home.
In conclusion, conventional loans can be a great way to achieve your dream of homeownership.
With less red tape and more options, conventional loans are the choice of many homebuyers.
So, after learning more about conventional loans, there is only one question left to ask yourself: could this financing option be right for my next mortgage?