Are you considering buying your first home? If so, you may be wondering about the different types of mortgages available. One option is a conventional loan. This type of loan has many benefits, but there are also some requirements and limits to consider. Here’s what you need to know about conventional loans.
Conventional loans are the most commonly used type of mortgage. They are available in both fixed-rate and adjustable-rate varieties, and require just a 5% down payment.
They also come with some inherent benefits, such as assumability and portability. In addition, there are no prepayment penalties with a conventional loan, which means you can pay it off early if you choose to do so without penalty.
Conventional mortgages come in all shapes and sizes, including the non-conforming variety. A jumbo loan is one that exceeds conforming limits – these types of loans can be a good option for those who want more bang their buck when it comes to getting financing.
In general, conventional loans have stricter credit requirements than government-backed ones. For example FHA mortgages require a lower debt to income ratio at 50% or less but there is no single set of guidelines that apply across all types and varieties so it's important you do your research before applying for either type.
Conventional Loan Requirements
To get a conventional mortgage, the down payment can be as low at 3%. However this will depend on your personal situation and what type of loan or property you are getting
- If you are not purchasing your first home or not making more than 80% of the median income in your city, you will be required to have 5% down.
- If you are not purchasing a single family home, you may need to put up to 15% down.
- If it is a second home, a minimum of 10% is required
- If you are using a jumbo loan you will be required to put down anywhere from 20% to 40%
- If you are using an adjustable-rate mortgage (ARM), the down payment is 5%
Our mortgage calculator can help you to understand what your payment will look like with any of the above scenarios.
Private Mortgage Insurance
Private mortgage insurance (PMI) protects your lender in case you default on the loan. The cost varies depending upon credit score and down payment size, but it's important to know that this extra coverage will be required if you put less than 20% toward a conventional purchase.
There are a few different ways you can pay for PMI, but the best option is usually covered in your monthly mortgage payment. If not, then an upfront fee or slightly higher interest rate will do just fine. Choosing which one works out cheapest depends on what type suits yourself as well as your finances.
PMI is an insurance policy that will be removed from your mortgage when you reach 20% equity in the home. This way, if anything happens to reduce or eliminate this monthly fee – say because of economic hardship- it won't mess up any payments.
- Credit Score – a credit score of 620 is needed to qualify for a conventional loan in most cases.
- Debt-to-income ratio – your DTI must be 50% or lower
- Loan Size- loan must fall within the limits set by Freddie Mac and Frannie Mae. It is also important to note that this limit changes annually.
The mortgage interest rate changes daily, so you need to be aware of what’s happening in order for your finances and credit score stay healthy. Conventional mortgages usually fluctuate by just a few points between 3% and 5%. For example, four-point fluctuations mean that one day they will fall below three percent while another finds them at or above five percentage points more likely than not (this is called “range”). It’s also important to remember the rate you receive will be based on your personal situation and the type of mortgage that is best suited for your needs.
Conventional loans generally offer lower costs than other loan types, and if you meet credit score requirements and have a down payment of at least 3%, a conventional mortgage might be the best solution for you. Bydand Home Loans can help you decide if this is the best fit for your situation. If you’re ready to take the plunge and feel like a conventional mortgage is right for you click the apply button below to get started!