What is a mortgage and what are the conventional loan requirements for qualifying for one? These questions plus more are answered for you here.
What is a Conventional Loan?
A conventional loan is a mortgage loan not backed by a government agency or program and that follows guidelines set out by Fannie Mae and Freddie Mac. Conventional loans can be broken down into “conforming” and “non-conforming” loans.
Types of Conventional Loans
Conforming loans are mortgages that conform to financing limits set by the Federal Housing Finance Agency (FHFA) and meet underwriting guidelines set by Fannie Mae and Freddie Mac, whereas non-conforming loans do not. With 15, 20 and 30 year term options available, borrowers are sure to find a loan term that suits their needs. You can use a mortgage calculator to better understand a home’s potential monthly mortgage amount.
Conventional Loan Requirements
Typically, a borrower needs a credit score no lower than 620 accompanied by a minimum 3 percent down payment to obtain a conventional loan. While some borrowers may get financing with a lower credit score, it would require a larger down payment. Although the conventional loan requirements do not state you have to pay 20 percent in a down payment, doing so could help you avoid paying private mortgage insurance (PMI) which is a great way to save money.
Because conventional loans are not backed by the government, they are bigger risk loans, which can make the qualifying process more difficult. The more conventional loan requirements there are, the less risk involved for lenders.
Who Are Conventional Loans Good For?
Conventional loans are an excellent choice for those who have a good credit score and low debt. Borrowers can utilize a conventional home loan to build equity quickly, as a large down payment will decrease the total amount owed. However, with conventional loans available with a down payment that can be from 3 percent, if you meet conventional loan requirements, it could be a good choice for you.
Advantages of a Conventional Loan
For those who like to plan and know what to expect, conventional loans offer rate options that do not change with the market, which is a huge advantage. For those with some flexibility, conventional loans also offer several down payment options and multiple term lengths, which can provide borrowers with the flexibility needed to meet their homeownership goals. Lastly, conventional loans are often processed quickly with fewer upfront fees.
Conventional Loan Limits
The amount you can borrow with a conventional loan is contingent upon the type of loan you choose and set by the FHFA. The current maximum conforming loan limit is $548,250 in most U.S. counties, $822,375 in high-cost locations and even more in some cities within California and Hawaii.
Because non-conforming conventional loans are not of federal interest, the lenders are free to set their own limits for non-conforming conventional loans, which include jumbo loans, or loans for more than $548,250. In most cases, jumbo loan limits are capped by the borrower’s financial situation. Regardless of the loan amount, using a mortgage calculator with taxes will help you know exactly how much your monthly mortgage payments will be.
Choosing the Loan Length That’s Right for You
With several conventional loan options available, you can find terms that work for you. The most popular option is a 30 year fixed-rate mortgage because of its flexibility. This option will leave you with a predictable monthly payment, a fixed mortgage rate and an affordable payment compared to shorter-term loans. A 20 year fixed-rate mortgage will also provide a predictable monthly payment and is completed sooner. Lastly, choosing a 15 year fixed-rate mortgage can help you build equity faster, pay off your home sooner and often has a desirable interest rate.
Contact Wyndham Capita Mortgage to determine if you meet conventional loan requirements today!