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Conventional Loans

 

"Conventional mortgage borrowers typically make larger down payments,

have secure financial standing and are at low risk of defaulting."

What Is a Conventional Mortgage?

 

A conventional mortgage is a home loan that isn’t guaranteed or insured by the federal government. Conventional mortgages that conform to the requirements set forth by Fannie Mae and Freddie Mac typically require down payments of at least 3%. Borrowers who put at least 20% down do not have to pay mortgage insurance premiums, which are typically required with FHA loans.

 

Lenders view conventional loans as riskier because they’re not guaranteed by the government if a buyer defaults, so these mortgages can have tougher requirements and higher rates.

Conventional mortgage borrowers typically make larger down payments than FHA borrowers, and they tend to have a more secure financial standing and are less likely to default. A larger down payment means lower monthly payments. Plus, with the ever-increasing mortgage insurance premiums on FHA loans, payments for conventional loans that don’t require private mortgage insurance can be much more manageable in comparison.

 

In addition, with a conventional loan, you can cancel your mortgage insurance when the principal loan balance drops to 78% of the home’s value. FHA loans charge mortgage insurance premiums for the life of the loan.

 

Credit scores for conventional home loans

 

Requirements vary from lender to lender, but 620 is typically the minimum credit score needed to obtain a conventional loan, and 740 is the minimum score you need to get a good mortgage rate. The term of a conventional mortgage is usually 15, 20 or 30 years.

Minimum down payment on a conventional loan

 

A conventional mortgage can require a sizable down payment in comparison to other types of mortgage loans. Conventional lenders have traditionally required up to 20% for a down payment, but now they can offer a 3% down payment program to compete with the 3.5% minimum down payment option for an FHA loan. Down payment requirements can vary based on the lender as well as the borrower’s credit history.

 

In addition to the down payment, borrowers are often responsible for origination fees, mortgage insurance and appraisal fees. As such, conventional loans tend to have a higher out-of-pocket cost at closing than other types of mortgage loans.

 

Conventional loans are an excellent option for borrowers with strong credit who can contribute a down payment of at least 3%, or perhaps quite a bit more.

 

In summary, A conventional loan can be the most cost effective loan as the opportunity to drop mortgage insurance can save a client money in the long term. However, its guidelines are a bit more stringent than the government-insured loans and can cost client’s money if they are having to wait to purchase a home in an increasing rate and home appreciation environment.