Buying a home is a major event in anyone’s life. It is filled with big decisions and a variety of choices. Location, size, style, and more are all options to consider. However, one of the most important decisions you’ll make will be which type of mortgage is best for financing your new home. There are several mortgage options, each with different benefits based on your needs. Here is everything you need to know about conventional loans.
A conventional mortgage is a home loan that is not insured by the Veterans Administration (VA) or by the Federal Housing Administration (FHA). However, conventional loans must adhere to the down payment and income requirements that Fannie Mae and Freddie Mac set and also conform to loan limits set by the FHFA (Federal House Finance Administration). Conventional loans are typically offered by lenders that also provide FHA, VA, and USDA loans.
Conventional loans are purchased by Freddie Mae and Fannie Mac which are Government Sponsored Entities (GSE) but are not government-owned. However, since the financial crisis in 2008, these entities have been in government conservatorship. They have different lending standards and requirements than FHA, VA, or USDA loans and are not government-insured.
Conventional loans are typically available in 15,20,25, and 30-year terms. You may also find that some lenders will offer a 10-year conventional loan. Remember that the shorter your term, the higher your monthly mortgage payment.
Conventional loans offer a variety of down payment options. Ultimately your interest rate and any additional mortgage insurance fee will be based on the size of your down payment. A 20% down payment will eliminate the need for private mortgage insurance, but there are lower down payment options. Your down payment for a conventional loan can be as low as 3%.
It is common for government-backed mortgages like FHA, VA, and USDA loans, to require an upfront funding fee. These fees typically range between 1% and 3% of the total loan amount. Conventional loans do not require a funding fee.
There are two types of conventional loans, conforming and non-conforming. A conforming conventional loan is a mortgage that is less than or equal to the conforming loan dollar amount limit set by the FHFA (Federal Housing Finance Agency). In 2020, for single-family homes this limit is $510,400.
A nonconforming conventional loan is a mortgage that exceeds the dollar amount limit established by the Federal Housing Finance Agency (FHFA). Any mortgage exceeding the limit set by the FHFA would be considered a nonconforming or jumbo loan.
In order to qualify for a conventional loan, typically, the minimum credit score is 620. The higher your credit score, the more favorable interest rate you will receive.
Private mortgage insurance, also known as PMI, is required on all conventional loans that make a down payment on the property of less than 20%. The amount of mortgage insurance you pay each month will be influenced by your credit score and the amount of your down payment.
Pre-approval and pre-qualification are two important first steps in the home buying process when it comes to getting a mortgage. Although they sound similar, they have different functions and offer useful information to prospective homebuyers. To better understand pre-approval and pre-qualification and how they might help you on your journey to homeownership, we've answered some frequently asked questions about them in this blog article.
An initial evaluation of your financial condition based on the data you give a lender is known as pre-qualification. It aids in estimating how much you might be able to borrow. Pre-qualification does not entail a careful examination of your credit report or a full check of your financial records. It gives you a general sense of your loan eligibility and helps you create a budget for house hunting.
Pre-approval, on the other hand, is a more in-depth process. It involves an evaluation of your credit history, income, and assets. During pre-approval, your lender reviews your financial documents and runs a credit check to determine the maximum loan amount you may qualify for. A mortgage pre-approval letter carries more weight and demonstrates to sellers that you are a serious and qualified buyer.
There are many benefits to having a pre-approval when buying a house. With a pre-approval, you are pre-approved for a specific loan amount. This saves time and allows you to focus your search on homes within your price range.
Your trustworthiness as a buyer is also increased by a pre-approval letter. Your bid is more likely to be taken seriously and preferred by sellers than those of others who haven't been pre-approved. In a competitive real estate market, it gives you an advantage.
Pre-approval necessitates a detailed analysis of your finances, which makes the subsequent loan approval procedure speedier. A pre-approval letter means your lender has already completed the majority of the paperwork and verifications, hastening the loan closing procedure.
Pre-qualification and pre-approval normally have a shelf life of 60 to 90 days. It's important to realize that throughout this time, your financial condition could change, which might have an impact on the final loan approval. Update your lender if there are substantial changes to your financial picture, such as a decline in your credit score, a fall in your income, or an increase in your monthly debt obligations.
The fact that you have a pre-approval is not the same as an approval for your loan. Rather, it is a preliminary evaluation of your creditworthiness based on the picture at that point in time. The final loan approval is contingent upon your property appraisal, a title search, and further underwriting standards. As long as there are no significant changes to your financial situation, pre-approval significantly boosts the likelihood of getting a mortgage.
It's typically advised to start with pre-qualification and go on to pre-approval after that. Pre-qualification aids in the creation of a practical budget by providing you with a preliminary grasp of your borrowing capability. Pre-approval delivers a more accurate assessment of your eligibility and strengthens your position as a serious buyer whenever you're ready to pursue homeownership seriously.
Pre-qualification and pre-approval are essential phases in the mortgage process. They boost your negotiation power, give important information about your borrowing ability, and speed up the loan approval procedure. For over 90 years, the experts at Standard Mortgage (NMLS#:44912) have been helping home buyers with their pre-qualification and pre-approval needs. Furthermore, Standard Mortgage retains and services all of their loans, so you have a partner over the life of your mortgage.
Every homebuyer has unique needs. Standard Mortgage strives to meet them with quality service and individual attention. We pride ourselves in giving you the mortgage information, loan options, and convenient assistance you’re looking for, including what to expect when you apply for a mortgage loan. With a variety of loan programs and an established network of lenders behind us, we help you find the loan that best suits your needs and at a competitive rate.
An adjustable rate mortgage (ARM) is a mortgage product where your interest rate may change at specified intervals over the life of the loan based on a predetermined index and margin.
A conventional loan must meet nationally standardized guidelines, such as income, credit, and property requirements. These mortgages are subject to loan limits set by the Federal Housing Finance Agency.
The Federal Housing Administration (FHA) - commonly referred to as HUD - issues loans that provide affordable mortgages to the average homebuyer.
A fixed-rate mortgage is the most common type of mortgage product. Your monthly interest and principal payments do not change over the life of the loan.
A jumbo loan, or non-conforming mortgage, is for homebuyers who expect to borrow more than $647,200* for single-family residences.
*this loan amount may vary based on geographic location
A USDA Rural Development loan helps rural home buyers purchase a home with no down payment, low fixed rates, simple credit requirements, and the guarantee of the federal government.
Veterans Administration loans help veterans — including active duty service personnel and certain categories of spouses — finance the purchase of their homes with favorable loan terms.
The team at Standard mortgage has developed additional and related content centered around mortgage pre-qualification and pre-approval.
Read more about the process from pre-approval to closing.
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Learn the differences between pre-qualification and pre-approval.
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Let us help you through the mortgage process from pre-approval to closing.
Read MoreStandard Mortgage is here to help you navigate the daunting, complicated process that lies ahead. In this eBook, we'll walk through the steps you'll have to take before you hold the keys to your new home.
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