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Conventional Loan for Home Buyers | 10 Reasons to Choose It

What does Conventional Loans Mean?

Conventional mortgage Loan is a type of mortgage loan that is generally not covered or guaranteed by the federal government.

 

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Types of conventional mortgage loans based on interest rates:

Conventional mortgages come with either fixed interest rates or with adjustable interest rates.

 

A “fixed-rate mortgage” is the basic and simple mortgage loan available. As the name suggests, the interest rate on a fixed mortgage remains constant during the entire term of the loan, which is usually fixed as 30 years.

 

An “adjustable-rate mortgage” comes with flexible interest rate that keeps changing throughout the life of the loan. Usually adjustable-rate mortgage programs come with a fixed pre-set margin, which is determined by the major mortgage index that it is related to. The rate of interest may increase or decrease depending on the direction of this mortgage index.

 

Types of conventional Mortgage loans based on compliance factors:

Conventional Mortgage Loans are offered as conforming or non-conforming. The Conforming type of conventional loans often complies with the principles formulated by Fannie Mae and Freddie Mac, which are government-sponsored organizations.

 

All conventional loans cannot be considered conforming. These conventional loans cannot be considered as federal loans although they comply with Fannie and Freddie.

When you decide to buy a house and take a mortgage, the options spread out in front of you is numerous. There are FHA, VA, USDA, Conventional, Exotic and various other loans. However the choice of the best option that suits you remains your final decision.

 

Here are 10 supporting features, if your choice happens to be the Conventional Mortgage Loan:

 

  1. Offered & Serviced Universally:

The Conventional Mortgage loan is offered in almost all the banks due to their flexibility feature. So when compared to FHA, VA and USDA, which have stringent procedures conventional mortgage loans are offered and serviced by many lenders. This makes it easy for the borrowers to access.

 

  1. Easy procedures & practices:

The procedures and the practices of getting a conventional mortgage loan, prove to be less cumbersome. So when left with a choice to select either a conventional loan or a non-conventional one, one has all reasons to go in for a conventional loan which is easy to acquire.

 

  1. Faster Approvals:

The conventional loan being a simple and straightforward type of mortgage loan, the approval also gets done faster. When other loans require varied steps and stops at various points of the process, you get to receive the conventional loans for your disposal at a faster rate.

 

  1. Flexible Loan requirements:

5 what does conventional loan meanThe Conventional loans come in different types and you are sure to get approved with either of these types. While conforming conventional loans require a higher credit score compared to other conventional loans, they do come with various flexible options. When you look at the non-conventional mortgage types, they come with even more flexibility and though having higher rates of interests, they definitely prove to be a better option when compared to adjustable rate mortgages.

 

  1. Lower Mortgage Insurance:

Upon comparing the Conventional mortgage loan with a FHA loan, a clear-cut vision can be interpreted, revealing the fact that the former ones come with decreased mortgage insurance. If you have a good FICO score, your mortgage insurance costs are reduced drastically.

Lets make the facts and figures more precise. Let’s look at the mortgage insurance costs for a $1,00,000 mortgage with a 10%down payment.

 

FHA loans Vs. Conventional loans – $200000 @4% with 10%downpayment with 720 FICO score

Loan Type

No. Of. MI Payments Rate % Total Amount at 5 years Total Amount at 10 years Full term Amount

FHA Total MI

(Upfront+Monthly)

132 1.75%+0.80%

(Annually)

$5568.49 $8964.76 $9585.48

Conventional Monthly MI

123 0.44%

(Annually)

$2100.16 $3968.11 $4054.55

Conventional Upfront MI

1 1.81%

(Upfront)

$1815 $1815 $1815

 

  1. Options to choose the type of Mortgage Insurance:

The special feature of Conventional Mortgage loans is the option to choose the MI type that will suit you. You may choose to pay your MI either monthly or upfront according to your financial position.

 

  1. MI Termination at 78% LTV:

This is the unique feature available only with conventional mortgage loans. Under this feature your MI premiums automatically cease after your LTV (Loan To Value ratio) touches the 78% value. Although this feature can be requested in certain other loan types, it often comes with tedious procedures attached to it that consumes time and money.

 

  1. Very Low Closing Costs:

Conforming conventional loan in particular is the type of Conventional mortgages that have a very low closing cost. The flexible and simple procedures make it the easiest and cost-effective mortgage loan type. Also the choice of option as to whether to pay the MI upfront or as a monthly premium makes you decide the actual closing cost of your mortgage loan.

 

  1. Conventional Mortgage Loans are penalty-free:

Levying penalty for low down payment might be the situation in other loan types, but it is not going to happen in Conventional mortgage loans. Conventional loans offer themselves as penalty-free products and also MI is limited after the LTV reaches 78%.

 

  1. Subsidiary Loan Options:

If you are opting to take a conventional mortgages but not convinced about paying the MI, then there is an option for you. You might try taking out a piggyback option, wherein you split your actual loan requirement into two, one for 80% and the other one might range from 10-15% depending upon the down payment you make for the loan. This way you can avoid paying MI, however you might have to pay a slightly higher rate of interest for the subsidiary loan. This option helps those who do not have a good credit score.

 

So you have quite a good number of reasons to choose a conventional mortgage loan to purchase your house. The eligibility procedures might be a bit stringent, but once you qualify for this type of loan, your life is rest assured. You can have the advantage of lower closing cost and also comparatively lower MI. All this will help you get out of your loans easily and will prevent you falling prey to a debt trap.

 

Mortgage Assumptions:

How does Mortgage Assumption function?

When you purchase a property from the seller, you also assume the mortgage along with the property and both the property and the mortgage get transferred to your name.

 

It should be understood that not all mortgage types are assumable. Only FHA loans, VA loans and USDA loans fall under the category of assumable loans. The Conventional Mortgage loan is not an assumable loan type. This gives you a precise answer to your query – Are Conventional Loans Assumable?

 

What is a Conventional Loan Down Payment?

Down payment is the amount that you initially pay while a deal is finalized. This down payment amount is fixed at various minimum levels depending upon the loan type you opt for.

 

The LTV ratio is calculated based upon the amount of down payment you make. It is calculated by dividing the amount you borrowed by the market value of the property. For example if you make a 4% down payment, your LTV will be 96%.

 

Generally the minimum down payment amount required for a conventional mortgage loan is fixed at 5%. So it comes with a LTV of 95%.

 

Do conventional Loans require PMI?

PMI (Private Mortgage Insurance) is to be paid to the lender if your loan down payment is below 20%. This is to protect the lender against defaults by the borrower. If you want to save the amount you pay towards PMI, then it is advisable that you make a minimum down payment of 20%.

 

If you have the following questions within you,

Can I get a conventional loan with 5 down?

Do conventional loans have PMI? Do conventional Loans have mortgage Insurance?

 

Yes you can definitely get a conventional loan with a 5% down payment and again it is a yes for your second question too, since PMI has to be paid for a down payment of less than 20%.

 

FHA v/s Conventional Mortgage:

Home Buyers are often perplexed as to which loan to go for between conventional loans and FHA. Home buyers are always on the look out for the best possible and cheapest offers for them.

 

So here are some comparative facts that clarify the buyers regarding their query – Is conventional loan better than FHA?

 

Down payment Options:

When choosing a Mortgage, the important aspect to be considered is the down payment factor. There are various mortgages’ that provide very low down payment like 3 down and 3.5 down. However you will have to choose these down payment options as per your financial ability and also considering the PMI factor.

 

Credit Scores:

Credit scores are not only important to know your financial status but it also plays a vital role in choosing the type of mortgage. FHA loans are better suited to buyers with average credit scores or lower, as the FHA mortgage rates will not increase for borrowers with low credit scores like the conventional mortgage rates. For people with better credit scores conventional mortgages are undoubtedly the best choice.

 

DTI Ratio:

Coming to the DTI (Debt to Income ratio) factor, conventional loans will not be offered to a person having his DTI ratio that exceeds 45%. Whereas FHA tries to accommodate people having their DTI ratios in 50’s, considering that they a stable income resource.

 

Upfront Mortgage Insurance Premium (UFMIP):

FHA loans require that the homebuyer pay an upfront mortgage Insurance premium of 1.35% of the base value of the mortgage, whereas Conventional doesn’t require such UFMIP to be paid.

 

So finally, to sum up the comparative features of FHA and Conventional mortgage types. If you are a person with a good FICO score above 720 with financial resources to make a 5% down payment and a DTI ratio well below the 45% mark, then conventional mortgage would perhaps suit you better. On the Contrary, if your FICO score is average or below average, the FHA will prove to be the better pick for you.

 

What Are Conventional Loan rates today? 

When you are considering mortgages, you ought to have some basic knowledge about the types of mortgage available and the corresponding rates.

 

The current mortgage rate analysis is generally based on live mortgage-backed securities (MBS) pricing specified by MBSQuoteline. MBSQuoteline is an instantaneous mortgage market data service provider to loan officers, real estate agents, and other finance experts. This data decides the rates for HARP 2.0, Conventional 97 loan and many other mortgage programs.

 

The rates are subject to change each and every day, probably every hour. So it is important that we keep ourselves updated before going in for a mortgage.

 

How many conventional loans can I have? 

The FHFA (Federal Housing Finance Agency) formulates and publishes the maximum limits that apply to all mortgages. This report gets published annually in two variations one for general loans and the other for high-cost area loans. This variation is due to the fact that real estate is closely related to the cost of the geographical location.

 

This maximum limit is the total outstanding principle.  You can have as many mortgages you want provided the sum total of the outstanding principles of all your mortgages is within the maximum limit specified by FHFA.

 

As per 2016, the maximum original principle balance (General Loans) is as follows:

States

1 Unit mortgage

2 Unit Mortgage

3 Unit Mortgage

4 Unit Mortgage

Contiguous states, District of Columbia and Puerto Rico

$417000 $533850 $645300 $801950

Alaska, Guam, Hawaii, and the Virgin Islands

$625500 $800775 $967950 $1202925

 

As per 2016, the maximum original principle balance (High-Cost Areas Loans) is as follows:

States

1 Unit mortgage

2 Unit Mortgage

3 Unit Mortgage

4 Unit Mortgage

Contiguous states, District of Columbia

$625500 $800775 $967950 $1202925

Alaska, Guam, Hawaii, and the Virgin Islands

$938250 $1201150 $1451925 $1804375

 

Inference:

At the end of the day, people have a wide variety of choices when it comes to low cost mortgages. The Conventional loan swipes over the other types of mortgages with its flexibility and easy processing procedures. However just as people have varying requirements and eligibility factors, so does the various mortgage types. Choose the type of mortgage loans that best fits your requirements.

PDF]Conventional Financing – Learn Mortgage

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