There are many different types of home loans so how do you know what is right for you? It can be an overwhelming process to think about so here’s everything you need to know about one of the most common mortgages available.
Let’s Start from the Beginning
Nearly 70 percent of all new home sales were financed using conventional home loans in 2019 according to the most recent Quarterly Sales by Price and Financing by the U.S. Census Bureau. This type of home loan is not insured or guaranteed by a government entity (like an FHA loan) but is backed by private lenders.
The two types of conventional mortgages are:
- Conforming Home Loan: This means the loan amount falls within the limits set by the government-sponsored loan programs. This type of conventional loan backs most of the mortgages available in the U.S.
- Non-conforming Home Loan: These are the types of mortgages that do not fit into the guidelines of a conforming home loan. They are often called jumbo loans since they typically represent larger mortgages. Non-conforming loans are more common in high-cost areas and require in-depth documentation in order to qualify.
There are a variety of options of conventional loan terms ranging from 10 to 30 years. Your loan term is how long you will be paying for your mortgage. So, if you take out a 30-year mortgage and pay each month, as directed, it will take you 30 years to pay off your mortgage. While it is true that most people are more familiar with the 30-year mortgage, there are other options available. For example, a 15 or 20-year mortgage may be a better option for you based on your long-term financial goals.
Conventional loan requirements vary from lender to lender so your first step to getting qualified for a conventional home loan is to talk to a Home Loan Specialist. Conventional loans are typically a good fit for someone who has a higher credit score (or no score if you are debt-free), a stable income, solid employment history, and down payment of at least three percent.
Private Mortgage Insurance (PMI)
Down payments are required for conventional home loans. In fact, as mentioned earlier- you will need to put at least 3 percent of the home’s purchase price down. If you put less than 20% down of the home’s purchase price, you will pay Private Mortgage Insurance. If you cannot put 20% down when buying a home, you can still reduce the amount of PMI you pay each month by putting some money down (the more, the better in this situation).
There are advantages if you choose to go with a conventional home loan. For example, you can use conventional loans for a variety of property types: single and multi-family homes, condos, and manufactured homes. You have lots of options!
Another advantage is you can avoid paying up-front mortgage insurance (like you would pay with an FHA loan) and possibly the monthly private mortgage insurance (PMI) if you have a 20% down payment. Even if you don’t have the initial 20% down payment, you will be able to remove PMI once the loan-to-value ratio reaches less than 78 percent.
Good News for Home Buyers
Rates are staying low which is good news for home buyers as home prices rise. Yes, we have seen rates fluctuate up here and there, but ultimately, they are remaining historically low. And while it is easier to score a good deal on a home loan with lower rates, the interest rate you end up with on your conventional loan has more to do with just the economy and current market trends.
To get the best rate available make sure you are in-the-know about your credit score and debt-ratio. Other factors that will contribute to your rate are home price, loan amount, down payment amount, loan term, etc.
If you have questions about conventional home loans or would like to compare you mortgage options, fill out the form below and we’ll connect you with a Home Loan Specialist licensed in your state.