All You Need to Know About Conventional Loans – Part 1

The article below is the first part of a two-part article. Be sure to check the second part when done reading below.

You’ve probably heard of conventional loans if you’re in the market for a new home. But what are they, and how do they differ from other types of loans?

What Is a Conventional Loan?

A conventional loan is a type of mortgage loan that the government does not back. These loans are not insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the US Department of Agriculture (USDA).

Conventional loans are available in various terms, from 15-year to 30-year fixed-rate mortgages and 5/1, 7/1, and 10/1 adjustable-rate mortgages.

What Are the Different Types of Conventional Loans?

There are many different types of conventional loans available to borrowers. The type of loan that a borrower chooses will depend on their individual needs and financial situation.

1. Jumbo Loans. A jumbo loan may be the right option for homebuyers looking to purchase a high-priced home or luxury property. Jumbo loans are conventional loans that exceed the maximum loan limits set by the Federal Housing Finance Agency (FHFA) and are not backed by the government. Jumbo loans are available in fixed-rate and adjustable-rate mortgage (ARM) options. Borrowers who want to make a smaller down payment may also qualify for a jumbo loan with a lower minimum down payment.
2. Conforming Loans. Conforming loans are also conventional loans that the government does not back. However, conforming loans are limited in how much they can loan. The maximum loan limits set by the FHFA are updated every year.
3. Non-Qualified Mortgages. Non-qualified mortgages (non-QM loans) are available to borrowers who do not meet the conventional underwriting guidelines Fannie Mae and Freddie Mac set. Because of this, the guidelines for non-QM loans are much less strict. As a result, some lenders may be willing to offer non-QM loans to borrowers with lower credit scores and income levels.

What Are the Requirements for Conventional Loans?

Are you looking to purchase a home but don’t know if you have the qualifications for a conventional loan? There are a few requirements you’ll need to meet.

• Credit Score. Your credit score is one of the most important factors in qualifying for a conventional loan. A high credit score shows lenders that you’re a low-risk borrower, which means you’re more likely to repay your loan on time. You’ll need a credit score of 720 or higher to get the best interest rates. However, you may still be able to qualify for a conventional loan with a lower credit score. But you’ll likely have to pay a higher interest rate and put down a larger down payment.
• Debt-to-Income Ratio. Your debt-to-income ratio (DTI) is the number of your monthly debt payments divided by your monthly income. Lenders use your DTI to decide how much of a mortgage you can afford. You’ll want a DTI of no more than 50% for a conventional loan. That means your monthly debt payments, including your mortgage payment, should be no more than 50% of your monthly income.
• Downpayment. You’ll need to put down at least 5% of the home’s purchase price for most conventional loans. If your credit score is 720 or higher, you may be able to put down as little as 3%. If you’re putting down less than 20%, you’ll also need to pay private mortgage insurance (PMI). This insurance policy protects the lender if you default on your loan.
• Closing Costs. When you close on your home, you’ll need to pay for things like loan origination fees, appraisal fees, and title insurance. These closing costs can add up, so be sure to factor them into your budget. You may be able to negotiate with the seller to have them pay some of the closing costs. And some lenders offer programs that can help with the costs.

Conclusion

A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. This loan is a good option for borrowers with good credit who can afford a down payment and meet the conventional loan requirements.

Contact Your Trusted Mortgage Specialist Today!

Now that you’ve read the first part of this two-part series, be sure to check out its continuation where we further discuss conventional loans. In the meantime, if you are needing help with a mortgage loan in Illinois, Indiana, Florida, Michigan or Wisconsin, you can contact us at MidAmerica Bancorp, Inc. Achieve your dream home with our team of experts! Get in touch with us today at (708) 237-4050 to get started.