This is a type of loan that conforms to the guidelines and requirements that are set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Often, this type of loan is referred to as a Conforming Loan.
A conventional loan is NOT part of any particular government program such as the Federal Housing Administration (FHA), Department of Agriculture (USDA) or the Department of Veterans’ Affairs (VA) loan programs — as these loans belong to the non-conforming loan category.
When you do get a conventional loan, you get to take advantage of the following benefits:
Conventional loans typically offer some of the best loan terms and interest rates, thereby decreasing your monthly payments. Moreover, it is also one of the most flexible loans in terms of applicability. It can be used to finance not just primary homes, but also rental properties or secondary homes.
The conventional loan is perfect for borrowers who:
✓ Want to take advantage of low-interest rates, stable mortgage payments, and fast transaction
✓ Want the flexibility to choose between a fixed-rate loan or an adjustable-rate loan
✓ Want to avoid paying for a mortgage insurance but are comfortable with making a downpayment of at least 20%
✓ Want to enjoy immediate equity in their home
✓ Are thinking of financing for a second home or for a rental property (not limited to primary residence)
✓ Have a good credit score and a stable income
✓ Want to have the ability to compare different lender fees
✓ Are looking into refinancing existing mortgages to save money
Since the conventional loan is not backed by any government agency, the requirements tend to be a little bit stricter than other types of loans. These requirements are put in place to protect the lender from borrower’s default.
However, you can prepare yourself by following these two steps:
If the property you wish to purchase has a value of$100,000, then you’d have to make a downpayment ranging from $3000 to $25,000, depending on your capability. Note that you don’t need to purchase mortgage insurance if you pay more than 20% of the property’s value.
Also, keep in mind that lower down payments are normally offered to those who meet additional requirements (say, you’re a first-time home buyer). However, if you do make a bigger down payment, you get to take advantage of the immediate equity in your home.
On this step, you’ll have to prepare both a good proof your income being stable, and have a good credit score.
For conventional loans, all of your monthly payments combined must not reach a certain percentage of your gross monthly income, depending on your case.
For instance, your monthly mortgage payments (if any) plus your other monthly non-mortgage payments (like credit card bills, car loans and etc.) must not reach 36% of your gross monthly income.
Moreover, as for your credit score, applicants who obtain conventional loans typically have a FICO credit score not lower than 620.
As with most applications for mortgages, you can never really perfectly determine what is best for you unless you speak to a trusted mortgage professional.
If you still have any questions or doubts in your mind, do feel free to leave us a message. We’d love to hear from you.
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