Conventional

A conventional loan is a type of mortgage that is not backed or insured by the government. It is offered by private lenders such as banks, credit unions, and mortgage companies. A common misconception is that conventional loans require more for a downpayment, but there are various options that allow you to go as loan as 3%! Here are the key aspects of a conventional loan:

1. Loan Eligibility: Conventional loans have specific eligibility requirements, including credit score, income, employment history, and debt-to-income ratio. Lenders typically prefer borrowers with a credit score of 620 or higher, although some may require a higher score for more favorable terms.

2. Down Payment: Conventional loans generally require a down payment ranging from 3% to 20% of the home's purchase price. The exact percentage depends on factors such as the borrower's creditworthiness, loan program, and lender's requirements. A larger down payment can help lower the monthly mortgage payments and may eliminate the need for private mortgage insurance (PMI).

3. Private Mortgage Insurance (PMI): If the down payment is less than 20% of the purchase price, lenders typically require borrowers to pay for PMI. PMI protects the lender in case of default and is an additional monthly cost for the borrower. Once the loan-to-value ratio reaches 80% or less, PMI can usually be canceled.

4. Loan Limits: Conventional loans have maximum loan limits set by the Federal Housing Finance Agency (FHFA). These limits vary by location/county and are adjusted annually. Borrowers seeking a loan amount that exceeds the conforming loan limit may need to apply for a jumbo mortgage. 

5. Interest Rates: Conventional loans offer both fixed-rate and adjustable-rate options. Fixed-rate mortgages have a consistent interest rate throughout the loan term, providing predictable monthly payments. Adjustable-rate mortgages (ARMs) have an initial fixed-rate period, typically 3, 5, 7, or 10 years, after which the interest rate adjusts periodically based on market conditions.

6. Loan Terms: Conventional loans typically have various loan term options, such as 15 years or 30 years. Shorter terms generally come with lower interest rates but higher monthly payments. The 30-year option features lower monthly payments compared to the 15-year option, but as you guessed, higher interest rates.

7. Documentation and Underwriting: Like any mortgage application, conventional loans require extensive documentation, including proof of income, assets, employment history, tax returns, and bank statements. Lenders evaluate these documents and conduct underwriting to assess the borrower's creditworthiness and determine loan approval.

8. Home Appraisal: To secure a conventional loan, the property being purchased or refinanced must undergo an appraisal to determine its fair market value. The appraisal helps ensure that the loan amount aligns with the property's worth.

Conventional loans offer flexibility, competitive interest rates, and a variety of options for borrowers. However, meeting the stricter qualification criteria and potentially higher down payment requirements can be challenging for some borrowers. Each situation varies Check out the other types of loan programs we have here. Consult with a Homestead Mortgage Advisor to learn more!