Recently, we answered the Top 5 Questions about FHA Loans. This week, we will discuss Conventional loans. If you are planning to purchase a home soon, read on to learn more about whether a Conventional loan might be the right financing option for you.
A Conventional or conforming loan is one which adheres to the guidelines set by Fannie Mae and Freddie Mac, and is not insured or guaranteed by the federal government. These loans can be fixed-rate or adjustable-rate. At any given time, approximately 35-50% of mortgages are conventional mortgages.
1) What kind of credit score do I need to qualify for a Conventional loan?
As with other loan types, credit score requirements for Conventional loans will depend on your lender. Conventional loans are designed for borrowers with good-to-great credit, and typically require a higher income and credit score than FHA loans.
2) What is the down payment amount for a Conventional Loan?
The minimum down payment for a Conventional loan is 3% for fixed-rate mortgages, and 10% for adjustable-rate mortgages. It is usually a good idea to have a larger down payment saved up, as a down payment of 20% or more on a Conventional loan means that you will not have to pay a monthly mortgage insurance premium in addition to your monthly mortgage payment.
3) How much can I borrow with a Conventional Loan?
Fannie Mae loan limits for Conventional loans vary by state and county. The current loan limit for a 1-unit property in the continental United States is $417,000. For counties in the U.S. that have been designated as high-cost areas, the loan limit is $625,500. To see what the loan limit is in your area, click here.
4) Should I get a fixed or adjustable-rate mortgage?
Conventional loans allow you to choose between a 15- or 30-year term, with a fixed or adjustable interest rate. A fixed rate mortgage means that your interest rate remains the same throughout the life of the loan. An adjustable rate mortgage means that your interest rate will fluctuate throughout the loan term, based on market conditions and other factors. An adjustable rate mortgage allows you to take advantage of falling rates without having to refinance; however, your monthly payments will change periodically. A fixed rate mortgage means that your monthly payments will not change, and that you will not be affected if interest rates go up. What type of loan you should choose depends on your financial situation and how long you plan to live in the house. Your Loan Originator can assist you in selecting the right loan type for your needs.
5) What are the benefits of a Conventional loan?
One of the main advantages of Conventional financing is that you will likely be eligible for lower interest rates than with an FHA Loan. Another advantage is that you do not have to purchase mortgage insurance with a down payment of 20%; and if you do opt for a lower down payment, your mortgage insurance premium may be cheaper than it would be with an FHA Loan. Additionally, should you need to take cash out for any reason during your mortgage term, you may be able to “cash out” up to 85% of your home’s value.
A Conventional loan can be an excellent choice for the right home buyer. If you have more questions about Conventional loans, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!