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Conventional Loans

Conventional Loans are flexible mortgage loans that can be attained from any lender, such as a bank or a mortgage company with a fixed rate or an adjustable rate since they are not insured or guaranteed by any government agency, such as the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA), and the Department of Veterans Affair (VA). Since they aren’t backed up by any government agency, this type of loan has its own fixed terms and rates.

What is a Conventional Loan?

A Conventional Loan is a type of a mortgage loan that’s not guaranteed, insured, and backed up by any federal or any government agencies such as the Federal Housing Administration (FHA), the Farmers Home Administrations (FmHA), and the Department of Veterans Affair (VA). Thought conventional loan can be obtained by any lender such as a bank or any mortgage company as it has its own fixed terms and rates and does follow Fannie Mae and Freddie Mac guidelines. Conventional loans might have either a fixed rate mortgage or an adjustable rate mortgage (ARM) depending on what you and your loan officer agreed on. Nowadays Conventional Mortgages do have a higher down payment and credit score requirements then the government loans. If the loan-to-value (LTV) exceeds eighty percent (80%) on a conventional loan, then private mortgage insurance is required by the mortgage lender. However conventional loans do provide more flexibility due to great rates and low costs. When borrowing conventional loans from a bank, do know the fact banks can set their own risks and guidelines. Conforming Loan is considered as a conventional loan but has a minimum credit score of 620 and high mortgage rate requirements yet still tend to have a maximum loan-to-value (LTV) ratio of ninety-seven percent (97 %) whereas a non-conforming conventional loan may require low credit scores and a high loan-to-value (LTV) ratio. The maximum limit for a conforming loan depends on the county and state you live in which can be found here atFannie Mae website.

Most Common Types of Conventional Loans

Fixed Rate Mortgages: No changes in your rate and payments.
  • 30 Year Fixed Rate Loan: in a 30-year Fixed Rate Loan, the interest rate remains the same for the duration of the loan resulting in the lowest fixed monthly payments though interest rates might be a bit higher.
  • 20 Year Fixed Loan: in a 20-year Fixed Rate Loan, you will be paying a lower interest rate than the 30-year fixed rate loan, which will result in low monthly fixed payments. One advantage is the fact you will be building your equity rapidly.
  • 15 Year Fixed Loan: in a 15-year Fixed Rate Loan, you will be paying less interest, allowing you to have an advantage to pay off your home more quickly compared to the 20- or 30- year Fixed Rate Loans allowing you to build equity more rapidly.
  • 10 Year Fixed Loan: in a 10-year Fixed Rate Loan, you will be paying the lowest interest rates and will be able to build equity more quickly than the long term fixed loans.
  • 5 Year Fixed Loan: a 5-year Fixed Rate Loan has the highest monthly payments to help you pay off your loan faster than the long terms fixed rate loans. You will be paying the same amount of interest for those 5-years.
Adjustable Rate Mortgages: Your interest rate may change annually after the initial period.
  • 3/1 ARM - has a Fixed Rate for 3 Years, the interest rate doesn’t change based on the index immediately but a 3/1 ARM can have an Adjustable Rate for the remaining 27 years.
  • 5/1 ARM - is a type of Adjustable Rate Mortgage with a fixed rate for the first five years than it has an adjustable that changes annually for the remaining life of the loan which can be up to 25 years.
  • 7/1 ARM - is a type of Adjustable Rate Mortgage with a Fixed Rate for the first 7 Years which can have an Adjustable Rate for the remaining 23 years.

Conventional Loan Requirements:

To acquire a conventional loan, you must have the basic qualifications of an eligible income and good credit with an intent of purchasing a home or simply lowering the rate or term of your existing home. Conventional Financing will allow you to borrow up to eighty-five percent (85%) of your home’s value if you ever need to take cash out for any reason. If you’d like to apply for a pre-approval of a loan which can help you determine what you can afford to borrow, you can also simply apply for a loan after you find a property you’re interested in buying, although it’s not guaranteed the fact you’ll be approved for the pre-approval of a loan, we highly recommend scheduling an appointment with us at no cost consultation for specific guidelines.

As of 2016, these specific requirements guideline will help you acquire a conventional loan:

• Down Payment:

A conventional loan requires as little as three percent (3%) down for a fixed rate term or ten-percent (10%) down for an adjustable rate term. Since December 2014, Fannie Mae and Freddie Mac opt out a new program that requires smaller down payments. Best part about Conventional Mortgage Insurance is that you can cancel it out anytime you would like.

• Private Mortgage Insurance (PMI):

Anytime you put less than twenty-percent (20%) down in a conventional loan, a Private Mortgage Insurance is required. Although Private Mortgage Insurance is much similar to an auto insurance, it’s a risk-based insurance which means you will have low premiums if you have a good credit history and the best part for those with a good credit is the fact that private mortgage on a conventional loan can cost less than Federal Housing Administration (FHA)’s mortgage insurance. So basically, when you have a good credit, you will have benefits.

• Income and Asset Documentation:

As with most other loan types, you’ll need to provide the following documentation to prove your income and assets:

  • Last sixty (60) days of all bank statements
  • Last thirty (30) days paystubs
  • If self-employed or have rental properties or have any type of non-salary income, you would need your tax returns of the past Two years (2 years’)
  • Two (2) years W2s
  • Social Security, retirement, and/or pension award letters
  • Two (2) years’ 1099s
  • Rental Agreements for any investment properties currently owned

Eligible Properties for Conventional Loan:

The following properties are qualified for conventional financing:

  • Detached Single Family homes
  • Planned Unit Developments (PUDs) which consist of detached homes, 2-, 3-, and 4- unit properties
  • Condominiums (many condo projects across the country are eligible with some requirements)
  • Some co-op properties
  • Manufactured homes (please note very few lenders offer this program)
  • Second Homes and Investment/Rental Properties

Is Conventional Loan right for me?

Simply fill out this form to see if you qualify and we will contact you soon as possible to help you with your mortgage and/or refinancing needs.