Conventional loans are secured by government sponsored entities such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes, single family to four family homes.
The Conforming Loan Limits are published annually by the Federal Housing Finance Agency (FHFA). Alaska, Hawaii, Guam and the U.S. Virgin Islands have loan limits that are 50% higher than the other contiguous states. Early in 2008, there were legislative changes that resulted in temporarily increases of the loan limits in certain high-cost areas in the contiguous United States. Here are a few websites to find additional information:
Jumbo loans are higher than the limits set by FHFA. They usually have a higher interest rate and some additional underwriting requirements. A strategy to lower your overall interest payment when your new balance is over the conforming limits is to use a combination of both a first and second mortgage. These are sometimes referred to as 80/10/10, 80/15/5, etc. Every situation is different, but is one more option to consider.
In addition to common loan structures such as fixed rate and adjustable rate, Fannie Mae and Freddie Mac have other loan programs for low to no down payments, community lending and affordable housing initiatives, construction to permanent, home improvement and reverse mortgages. Consult your mortgage professional and consider all your options.
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What You Need To Know About Conventional Mortgage Loans
You have spent weeks, maybe months searching for the perfect dream home, and you have finally found it. Maybe it has the right amount of bedrooms and a backyard with mature trees, perfect for a growing family. It might be an easy commute to work, and walking distance to your favorite restaurants and shops. Maybe it is smack dab in the middle of bustling city life that makes you feel alive and excited. No matter what your dream home looks like, it is time to start looking at mortgage loans. But where do you start?
What is a conventional mortgage loan?
As perfectly explained by NerdWallet.com, a personal finance website that helps people make smart decisions when it comes to their money, a conventional mortgage loan is “a home loan that isn’t guaranteed or insured by the federal government”. There are programs put forth by the Federal Housing Administration and the United States Department of Veteran Affairs that provide affordable lending options for homebuyers who may not have the best credit score or buying power. But while that sounds appealing, there are instances when a conventional mortgage loan can be a much better option for borrowers.
FHA Loan vs. Conventional Mortgage Loan
As with anything, there are pros and cons of each type of mortgage loan that people should consider when looking at finding a lender.
There are fewer requirements you must meet to be approved for a FHA loan, but there are typically more restrictions such as non-occupant cosigners, the use of the property, and mortgage insurance.
- You don’t have to have a huge down payment to get a loan. You can put as little as 3.5% down.
- You don’t have to have a sparkling credit history to qualify for a FHA loan. For a payment of 3.5% down you only need a credit score of 580. If you have a really poor credit history you can still qualify for a loan with a down payment of 10% if your score is between 500 and 579.
- There are many lenders that are involved with the Federal Housing Administration that will guarantee you financing as long as you meet the criteria.
- It’s easy to refinance your FHA loan with no income check or home appraisal.
- Your debt-to-income ratio can be as high as 50%. It may not be advisable to buy a home with a DTI that high, but it’s always nice to know you have options.
- There is a higher allowance for closing cost assistance. Most loans cap it at 3%, while this loan will allow sellers to contribute up to 6%. That is usually enough to cover most of the closing costs associated with buying a house.
- If your down payment is less than 20%, you are required to have mortgage insurance. Unlike a conventional mortgage loan, this insurance will last for the lifetime of your loan. The only way to get rid of that mortgage insurance is to refinance to a conventional loan. However, an upside is the FHA premiums will cost the same, it doesn’t matter what your credit score is.
- Any non-occupant cosigner must be listed on both the loan and the title.
- Any home purchased with a FHA loan must be your primary residence. It can’t be used for rental or income properties.
- There is a strict appraisal process. There are firm guidelines for what is and is not acceptable for a FHA qualifying home, and a lot of them are up to the discretion of the appraiser. If the house you wanted was a fixer-upper or even just needed repairs, this is not the loan for you.
- There is a cap on how expensive of a house you can buy. This is determined by the area you live in. According the the Federal Housing Administration, these loans were created to help low to moderate income buyers. They were not intended for those looking to buy super high-end or expensive homes. For example, in Maricopa County the limit for a single family home is roughly $295,000.
- In most cases, you will have had to work for the same employer for at least two years to qualify for the loan.
For the most part, a FHA loan can be an excellent idea for first time home buyers, especially since most don’t have the resources to put a significant down payment on a house. But depending on your situation a conventional mortgage loan might be a better idea.
- A conventional loan can be used for rental properties, homes you intend to flip and sell, or a house that is the perfect fit aside from a few repairs. Appraisals are usually up to the buyer’s discretion, some lenders even allowing buyers to do the process themselves.
- Mortgage insurance usually drops off as soon as you’ve reached 20% equity in your home. Compared to the full length of the loan, that is a lot of money saved in premiums that could be put towards the principal of the loan or that new dishwasher you’ve had your eye on.
- The loan limit is as big as you can make it. It will entirely depend on your income, your assets, your credit score and your lender. If you’re looking to purchase a getaway cabin in Park City, Utah, you set your own limits. You can be as lavish or down to earth as you want.
- A co-signer must be on your mortgage, but not on your title. This does pose a greater risk for the person who is helping you borrow the money, but allows you to acquire all of the earned equity put into the house.
- Depending on your lender and your credit score, you only need as little as 3% for a down payment when getting a conventional mortgage loan.
- A possible pro is that mortgage insurance is credit sensitive. If you have an excellent credit score, your rate could be considerably lower than if you were using a FHA loan.
- Equity typically builds up faster with a conventional mortgage loan since down payments are usually larger.
- The biggest con of a conventional mortgage loan is the possibility of a higher interest rate. If your credit score is good, but not great, it could be much higher than it would be with an FHA loan.
- It might be harder to get approved for this type of loan if your credit score is less than perfect.
- Most of the time you can’t roll closing costs into the mortgage repayment plan like you can with an FHA mortgage loan.
Honestly, there are a lot of advantages to both types of loans. It really depends on your individual situation, your intentions for the property, and the money that you have at your disposal for a down payment. If you have a good credit score, stable income and a decently sized down payment, the conventional mortgage loan is a much better option. It will save you money in the long run without having to pay mortgage insurance premiums, and you have more options in the kind of buying experience you want to have.
FHA Loan vs. Conventional Mortgage Loan
HomeMortgage.com works with lending officers all over Arizona. We work hard to help home buyers just like you find the best mortgage company to meet their needs in cities such as:
- Queen Creek
- Sun City West
- Litchfield Park
- Paradise Valley
- Casa Blanca
- Chandler Heights
- Sun Lakes
- Cave Creek