Bluestar Mortgage of Orlando has excellent options for Conventional loans. Give us a call at 321-400-5545 to speak with a conventional loan expert who can help you determine if a Conventional Loan is the right option for you. You can also click on the Schedule a Free Consultation button below
A conventional loan is a type of loan that the government does not guarantee; instead, support comes from private creditors, and the borrower typically pays for the insurance.
There are two significant classifications of conventional loans, conforming and non-conforming. The main characteristic to remember in these two kinds of loans is their loan limits which conforming loans have while non-conforming loans do not. A conforming loan is one of the best categories of conventional loans, as it conforms to the guidelines set by the Federal Housing Finance Agency, specifically Fannie Mae and Freddie Mac. These federally supported companies buy loans from creditors and sell them to investors. Conforming loans usually have fixed rates compared to non-conforming loans, which often have higher interest rates.
Although there are various sets of guidelines that fall under the umbrella of “conventional loans,” there is no single set of requirements for borrowers. Generally, conventional loans have stricter credit requirements than government-backed loans like FHA loans.
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Conventional loans are also available in a variable-rate arrangement along with fixed-rate loans. Variable-rate loans are also called adjustable-rate mortgages (ARMs). The ARMs are most advantageous for homeowners who do not plan to dwell in their homes for more than seven years. Usually, it has lower monthly payments than fixed-rate loans, which is best suited for homeowners who would otherwise pay a high-interest rate on a fixed-rate loan. One important thing to remember with variable-rate loans is that interest rates can change after the initial fixed-rate period ends. This will be favorable since you will have lower monthly or annual payments, but it may also cause payments to increase. Because the interest rate tends to fluctuate, it’s difficult to predict what your upcoming payments will be with a variable-rate loan.
Credit Score: Your credit score must be at least 620 to qualify. The creditor will also review your credit history to determine if you have a good credit standing. Otherwise, you might not get approved for the loan.
Debt-to-income ratio (DTI): This is the proportion of your monthly income that goes to pay off your debts. Estimate your DTI by adding your minimum monthly debt payments (such as credit card and car payments) and dividing the total by your monthly income before taxes. DTI on most conventional loans should be 50% or lower.
Loan size: In a conforming conventional loan, the loan limits must be within the limits set by Fannie Mae and Freddie Mac, which differ yearly. As of 2022, the conforming loan limit for a single-family home is $647,200. While in other high-cost areas of the country, like Hawaii, loan limits are higher, ranging up to $970,800. To check the loan limits specifically for your region, visit the Federal Housing Finance Agency’s website.
Down Payment: A down payment of as low as 3% is likely for first-time home buyers. However, the down payment requirements can vary depending on the type of loan or property you want to buy. Below is the required percentage based on your situation:
Down payment of 5%: This is for a buyer who has not exceeded 80% of the median income in their area and is not a first-time buyer. Also, applicable if a buyer is getting an adjustable-rate mortgage.
Down payment of 15%: This is for a buyer purchasing a house that is not a single-family home, meaning it has more than one unit.
Down payment of 10%: This is for a buyer purchasing a second home.
For refinancing a conventional loan, a buyer will need more than 3% equity, but in most cases, at least 5% equity is required. While at least 20% equity in the home is needed for a cash-out refinance. You can use a mortgage calculator to help you determine the amount of down payment for your upcoming monthly payments.
Private Mortgage Insurance (PMI). If your down payment is less than 20% on a conventional loan, you will be compelled to pay for PMI. It will safeguard the mortgage investors in the event of loan default. The cost differs based on the size of your down payment, credit score, and loan type. There are various ways to ensure payment of PMI, which is often included in your monthly mortgage payment. Other buyers paid the fee at their closing costs, while others pay it at a slightly higher interest rate.
The good thing about PMI is that it will not be part of your loan forever. Once you achieve the 20% equity in the home on your regular mortgage payment schedule, you may request your lender to remove the PMI from your mortgage payments. Moreover, if you reach 22% equity in the home, the PMI will be automatically removed from your loan by the lender.
Even though conventional loans entail an additional down payment, you are not required to purchase mortgage insurance, which is an added expense most first-time homebuyers face when applying for a government-backed mortgage instrument.
Since you need to put down more money, your monthly payment will be in smaller amounts. As you will not need to settle mortgage insurance, your monthly payment will be an even lower amount than before.
Conventional loans can have fewer conditions for home buying compared to other types of loans. Since the government has a vested interest in government-backed mortgages, there are often many reporting requirements to qualify, as well as more limitations on these types of home loans. As conventional loans tend to have less rigorous requirements, the default risk is lower.
In cases where the homeowner does not dwell in the home, Conventional loans can be utilized for rental properties.
In a conventional loan, you are permitted to invest above the home’s current value compared to an FHA loan, which can only finance you up to the amount the property is worth. The extra funds will then be handed to you in cash, which you can use for your other needs, such as buying furniture for your new home or an immediate home improvement, like a backyard. While you will be financing these extra costs, the interest rate will be lower than if you invest through other means.
If you’re interested in a conventional loan, call us at 321-400-5545 to speak with a Conventional loan expert who can help you determine if a Conventional loan is the right option for you.
We guarantee that we will be able to close on or before your set closing date or we will waive all of our lender fees.
