Conventional Loans 101

Buying a house is not a one size fits all situation. There is no archetype when it comes to home ownership. Maybe you dream of a white picket fence, split level, mid-century modern home. Or maybe you’re a clean lines modernist who dreams of a penthouse with white marble as far as the eye can see.

When people imagine their first home, they usually dream of how they will decorate it and the memories they plan on making there. Very rarely, do they daydream of the paperwork or their loan type.

But the financing of your home is critical for the keys to the kingdom, so spending some time thinking about it is necessary.

And just like there are all kinds of first-time home buyers, there are multiple types of loans.

Today we will focus on the most popular and common type of mortgage – the conventional loan. The convention loan has become one of the standards of home loans in the country. For first time home buyers (and for those repeat buyers with more than three years since their last purchase), this mortgage is the one that many are reaching towards.

What is a conventional loan?

Much like the name suggests, a conventional loan is a more traditional loan. For those first-time homebuyers with decent credit and a good down payment, this loan type has some freedoms others do not.

Conventional loans are not government backed mortgages; therefore, these are not insured or guaranteed. Instead, they follow a path laid by Freddie Mac and Fannie May. These are two agencies that set the standard on mortgage lending in the United States.

Who qualifies for a conventional loan?

As we shared, conventional loans are not backed by the government. Because of this, these loans do not have an established safety net for the lender if the buyers stops making payments on their mortgage. What this means is that the loan is riskier. With higher risk comes higher qualification requirements. And as daunting as that may sound, the parameters are not beyond reach.

 

The ideal candidate for a conventional loan would be someone who has:

• Solid Credit History: Credit scores 620 or higher are needed
• Sizable Down Payment: The ideal is 20%, which would allow the buyer to avoid PMI (Private Mortgage Insurance). However, some can qualify for a conventional loan with a down payment as low as 3%! This makes it very attractive for a first-time home buyer.
• Established Employment History: Providing proof of consistent income from a regular employer will increase your chances of qualification.
• Debt Ratio: Having a debt balance of less than 50% of your gross monthly income is needed. This would include the potential house payment.

What are some of the benefits of a conventional loan?

Probably one of the biggest sways is that you get to call a lot of the shots in the process. Unlike government-backed loans, a conventional loan does not require limited terms, fixed rates, or specific property types/neighborhoods. Here are just a few perks of conventional loan decision making:

Conventional Loan Terms:

Conventional loans come in 15, 20, 25, and 30-year terms. This is great flexibility for those that want to make a decision based on monthly payments. Shorter terms are obviously going to come with a higher monthly cost, but they will also be paid off sooner than a longer-term loan. A 30-year mortgage will result in a lower monthly payment. These loans, however, will result in more money going toward interest payments when you look at the loan lifespan.

Fixed vs Adjustable rates:

Having a “fixed rate” means that your interest rate will be fixed for the length of your loan term. What this means for you is that your monthly payment will remain the same, regardless of interest rates rising. This typically is a peace-of-mind for most buyers.

 

Having an adjustable-rate mortgage is one that starts with a low fixed rate for a trial period. This period can be anywhere from 1 to 10 years. After that time period passes, the loan will adjust to reflect the rates in the current market. What this means for you as a buyer is that your mortgage loan could increase (or decrease) depending on when the loan is adjusted. This could be good for those buyers that need a ramp-up period but who also know that their finances will be a different position in a few years. In other cases, this could be a risky option for those buyers that do not want to deal with fluctuating monthly payments.

Pick where you want to live!!!

Of all the pros of conventional loans, this is one of the biggest. Other loans have limitations on neighborhoods and even the type of properties a buyers can purchase. With conventional loans, you will have the freedom to select a home based on what you actually want. This can include condos, vacation homes, lots of acreage, manufactured homes…the list goes on. This advantage is a powerful reason to consider a conventional loan route.

 

Conventional loans can be a solid road to home ownership. It is a traditional path for even the most non-traditional of folks. So, whether you’re packing up your pachouli or your Goop candles, this loan can have you making a house a home in no time.

 

To learn more about if you can qualify for a conventional loan, give us a call today!