Understanding Conventional Loans

Choosing a loan for your home purchase

There are several home loans to choose from when it comes to your home purchase. When preparing to purchase your home, picking the right loan is just as important as picking the right property. Each individual’s financial situation will impact the type of loan they are eligible for and the type of documentation your lender will ask you to provide in order to qualify for the requested financing. Loan types range from Conventional, FHA, VA, and USDA. Some driving factors that will determine the type of loan product you qualify for will be your credit score and the amount of money you have available for a down payment. The amount of funds you have available for your down payment will make a difference on the programs you will be eligible for. As a buyer the sooner you can be proactive in saving up a sizable down payment will increase the opportunity of you qualifying for a Conventional loan. Taking action to put aside a monthly amount for your expected home purchase will become second nature. The amount you are putting aside should be close to the amount you feel comfortable with paying for your mortgage. If you feel comfortable with paying a mortgage of $1800 for example this should be the minimal amount you are putting in your savings account for your purchase on a monthly basis. Using an online mortgage calculator can give a great example of how much a monthly payment may be for a specific purchase price. Websites such as Smartasset.com and Nerdwallet.com; will let you play with multiple scenarios. Let’s take a minute to look at Conventional lending and why this loan product may benefit your home purchase needs.  

What is a Conventional

Conventional loan products are broken into two types of catagories; conforming and non-conforming loans. Conventional loans are not backed by a government agency. Conventional loans are serviced by private mortgage lenders like banks, credit unions and other financial institutions and are offered by Fannie Mae and Freddie Mac. Conforming conventional loans requires a score of 660 or higher and comes with lending limits regarding loan size. For higher loan amounts a non conforming Jumbo loan should be considered. Conventional loans also included fixed-rate, adjustable-rate, low-down payment (HomeReady and Home Possibile). Fixed rate conventional loans stay the same throughout the term of your loan. The Adjustable rate conventional loan also known as an ARM has an adjustable rate which fluctuates several times throughout the life of the loan. Your interest rate affects your monthly payment. A fixed rate will equal a fixed monthly dollar amount as an adjustable rate will mean your monthly payment amount will change periodically. Fannie Mae’s HomeReady program is a product similar to FHA without mortgage insurance. HomeReady has a minimum credit score requirement of 620 , Loan to value maxim limit, income limits apply at 80% of the Area Median Income for the property location. Freddie Mac Home Possible income requirement is 80% of the Area Median for the property location, borrowers minimum credit score of 640. Reduced Mortgage Insurance, and gift funds are eligible for the entire down payment.

Benefits of Conventional Loans

Home buyers can see faster underwriting and less documentation requirements when looking to go conventional. Term limits are offered in a variety of sizes from 10, 15, 20, and 30 year fixed mortgages. Mortgage insurance is not required if the loan to value is under 80% and there is no limit to the number of conventional loans you can have at one time. The current housing market can help increase the benefit of going with a conventional loan. We are seeing a sellers market in the state of Colorado and buyers are needing to show a lot more flexibility with the type of selling conditions that are coming with purchasing a home. For example, we have seen in 2020 and 2021 home sellers are selling their homes as is and asking to waive inspection and sometimes even an appraisal . A conventional loan can work with these requests as long as the buyer understands what they are waiving regarding the property purchase. To find out more about Conventional Loans and inquire how you can be pre-qualified for a home purchase call Gina Balderas with Major Mortgage.