Bluestar Mortgage of Schaumburg, has great options for Conventional Home Loans. Give us a call at 847-230-4030 to speak with a Conventional Loan expert who can assist you in determining if a Conventional Loan is the right option for you. You can also click on the schedule a free consultation button above.
Conventional Home Loan
A conventional home loan is a kind of loan that the government does not protect; instead, the support comes from private creditors, and the borrower typically pays the insurance.
There are two significant classifications of conventional home 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. Conforming loan is one of the best categories of a conventional home loan since it conforms to the guidelines set by the Federal Housing Finance Agency, i.e., Fannie Mae and Freddie Mac, which are federally supported companies that buy a loan from creditors and sell them to investors. Conforming loans usually have fixed-rate loans as compared to non-conforming loans, which probably have higher interest rates.
Though there are varied sets of guidelines that fall under the umbrella of “conventional loans,” there’s no single set of requirements for borrowers. Generally, conventional loans have stricter credit requirements than government-backed loans like FHA loans.
Conventional home 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 alter 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 of the interest rate’s tendency to vary, it is difficult to foresee what your upcoming payments will be with a variable-rate loan.
What are the requirements for Conventional Home Loan?
- Credit Score. Your credit score must be at least 620 to qualify, which your credit history will be investigated by the creditor to find out 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 home loans should be 50% or lower.
- Loan size: In a conforming conventional home loan, the loan limits must be within the loan limits set by Fannie Mae and Freddie Mac which differ yearly. As of 2022, for a single-family home, the conforming loan limit 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 on the loan limits specifically for your region, you can visit the website of the Federal Housing Finance Agency.
- Down Payment. A down payment of as low as 3% is likely for first-time home buyers. But the down payment requirements can differ on the type of loan or property you want to acquire. Below is the required percentage based on your personal 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 who’s purchasing a house that is not a single-family home, meaning with more than one unit.
- Down payment of 10%. This is for a buyer who is procuring a second home.
- For refinancing a conventional home loan, a buyer will need more than 3% equity, but in most cases, at least 5% equity is required. While 20% equity, at least, in the home is needed for a cash-out refinance. You can refer to a mortgage calculator to assist you in 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 home loan, you will be compelled to pay for a 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 commonly done through your monthly mortgage payment. Other buyers paid the fee at their closing cost while others pay it with 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 take away 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.
Advantages of a Conventional Home Loan
- Even though conventional loans entail 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 place more money down, there will be fewer amounts in your monthly payment. The fact that you will not need to settle mortgage insurance, your monthly payment will be even a lesser amount than before.
- Conventional loans can have lesser conditions to home buying compared to other types of loans. Since the government has a vested interest in government-backed mortgages, most often, there are a lot of reporting requirements to qualify, much more limitations on those types of home loans. As Conventional loans have a tendency for 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 as cash which you can utilize for your other needs, such as buying furniture for your new home or an immediate home improvement that you want, such as a backyard. While you will be financing these extra costs, the interest rate would be less than financing through other means.
Connect with a Bluestar Mortgage Conventional Home Loan Expert
If you are interested in a Conventional loan, call us at: 847-230-4030 to speak with a Conventional loan expert who can assist you in determining if a Conventional loan is the right option for you.