The first thing most people consider when buying a home is how they are going to cover the payments. It’s not everyday that someone can make a cash offer on a home so the typical route is via financing. There are multiple ways to finance a home with a lender but the most common option is a conventional loan. The main difference between this loan other common ones like the FHA or Va loans is that is not backed by the government.
Types of Conventional Loans
A non-conforming loan usually has a larger limit than conforming loans and also can be known as jumbo mortgages. Since these loans are above the limits set by Fannie Mae and Freddie Mac, they don’t “conform” so they are called non-conforming loans, but they do vary based on county so it is important to research the limits in the area in which you intend to purchase.
If you are looking for a loan for a specific purpose such as investment, you might consider researching portfolio loans. Portfolio mortgages are quite a bit different than other conventional loans so their terms and features can work out for those that may not qualify for a typical loan. This means that if you happen to have stocks and bonds that can be kept in portfolio for the life of a loan, you may qualify for this type of loan even if you don’t qualify for a typical loan.
The last type of conventional loan you may want to consider f you have a lower credit score is a sub-prime mortgage. The interest rate and fees are usually higher, but they do give those with less than perfect credit a chance to still purchase a home. These come with special regulations created by the government but they are not backed by the government so they are still considered conventional loans.
Things To Consider
The primary consideration lenders consider when discussing your eligibility for a loan is your credit score and credit history as it’s going to determine your creditworthiness, which in turn is what is used to qualify you for a loan in the first place.
Many first time home buyers start looking at homes before they consider financing because they just want to see what’s out there. It’s a good idea to start thinking about a down payment as this time as well. If you are able to come up with a large down payment, you may have better options in regard to your interest rate to keep your monthly payments as low as possible.
The last thing to take into account when determining the type of loan that works best for you is why you are buying a home. If you are purchasing for the first time versus if you are looking for an investment, the type of loan is going to change based on your situation. If you want to stay in the home until it’s paid off, you’ll want to make sure your payments are consistent over the life of the loan as well unless you think you’ll be refinancing at some point.
Contact Us Today!
If you are considering buying a home have not settled on your financing options, we want to help you figure out the best options for you. Don’t hesitate to contact us at North Star Mortgage in Jacksonville, FL today!
A conventional mortgage refers to a home loan that is not insured or guaranteed by a government agency such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA). Instead, conventional mortgages are backed by private lenders, such as banks, credit unions, or mortgage companies.
Here are some key points to understand about conventional mortgages:
- Loan Requirements: Conventional mortgages typically have stricter eligibility requirements compared to government-backed loans. Lenders evaluate factors such as credit score, income, employment history, debt-to-income ratio, and the borrower's financial stability when determining loan approval.
- Loan-to-Value (LTV) Ratio: The loan-to-value ratio is the percentage of the home's appraised value that the lender is willing to finance. Conventional mortgages often require a lower LTV ratio, meaning borrowers may need a larger down payment compared to government-backed loans. A down payment of at least 20% of the home's purchase price is typically needed to avoid private mortgage insurance (PMI), which is an additional cost to protect the lender in case of default.
- Mortgage Insurance: If the down payment is less than 20%, private mortgage insurance (PMI) is usually required on conventional mortgages. PMI protects the lender if the borrower defaults on the loan. It is an additional monthly cost added to the mortgage payment until the homeowner reaches a certain level of equity in the home.
- Interest Rates: Conventional mortgage interest rates can vary depending on factors such as the borrower's credit score, loan term, loan amount, and current market conditions. Rates can be fixed (stay the same throughout the loan term) or adjustable (fluctuate over time).
- Loan Limits: Conventional mortgages have loan limits set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that purchase and guarantee conventional mortgages on the secondary market. These loan limits vary by location and are periodically adjusted to reflect changes in home prices. Borrowers seeking loans that exceed the loan limits may need to consider jumbo loans, which have different requirements.
- Loan Terms: Conventional mortgages typically offer various loan terms, including 15-year and 30-year options. The loan term affects the monthly payment amount and the total interest paid over the life of the loan.
- Home Appraisal: Like other mortgage types, conventional mortgages require a home appraisal to determine the property's value and ensure it meets lending standards.
Conventional mortgages offer flexibility, competitive interest rates, and a range of loan options. They are commonly used for primary residences, second homes, and investment properties. It's important to compare different lenders, review loan terms, and seek pre-approval to understand the options available and find the best conventional mortgage that suits your financial situation and homeownership goals. Consulting with a mortgage professional or loan officer can provide personalized guidance tailored to your needs.