Conventional Loans
Overview:
Conventional loans are a type of mortgage that is not backed by a government agency like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, they are offered by private lenders and follow guidelines set by Fannie Mae and Freddie Mac.
The Highlights:
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Flexible Loan Options: Conventional loans offer a wide range of options in terms of loan terms (such as 15-year or 30-year loans) and down payment requirements. This flexibility allows borrowers to choose a loan that best fits their financial situation and long-term goals.
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Private Mortgage Insurance (PMI) Control: While conventional loans generally require a 20% down payment to avoid private mortgage insurance (PMI), borrowers who put down less than 20% can still benefit. PMI can be canceled once the loan-to-value ratio (LTV) reaches 80%, giving borrowers the opportunity to eliminate this additional cost over time.
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Most Occupancy Scenarios Allowed: From primary residences to vacation and investment homes, Conventional loans can be used to buy. There are even options to have a co-borrower to assist with qualifying if needed.
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Suitable for Various Property Types: Conventional loans are more versatile when it comes to the types of properties that can be financed. They are not limited to primary residences and can be used for second homes, investment properties, and even certain types of condominiums and co-ops.
UNDERSTANDING THE DETAILS
SECTION 1
Understanding Conventional Loans
While conventional loans are conforming loans, there is another type of mortgage called a jumbo loan. A jumbo loan exceeds the conforming loan limits, catering to larger mortgage amounts.
Conventional Loan Requirements The specific requirements for conventional loans can vary, as they encompass various guidelines. Generally, conventional loans have stricter credit requirements compared to government-backed loans such as FHA loans.
SECTION 2
The Down Payment
First-time homebuyers can secure a conventional mortgage with a down payment as low as 3%. However, the down payment requirement depends on your personal situation and the loan type or property you're acquiring.
Here are a few examples:
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If you're not a first-time homebuyer or earn more than 80% of the median income in your area, the down payment requirement is 5%.
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For properties with multiple units, a down payment of 15% may be necessary.
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Purchasing a second home typically requires a minimum down payment of 10%.
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If you opt for an adjustable-rate mortgage, the minimum down payment requirement is 5%
When refinancing a conventional loan, you'll need at least 5% equity.. If you choose a cash-out refinance, ensure you maintain at least 20% equity in your home.
SECTION 3
Private Mortgage Insurance (PMI)
If your down payment is less than 20%, you'll be required to pay for private mortgage insurance (PMI). PMI safeguards your mortgage investors in case of loan default. The cost of PMI varies based on factors such as loan type, credit score, and down payment size.
PMI can be paid as part of your monthly mortgage payment, including as an upfront fee in closing costs, or through a slightly higher interest rate. Once you reach 20% equity in your home, you can request your lender to remove PMI. If your home's value appreciates, you can also request a new appraisal to recalculate your PMI requirement. At 22% equity, PMI is automatically removed from your loan.
SECTION 4
Other Requirements
Credit Score:
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Most conventional loans require a minimum credit score of 620. Lenders assess your credit history during the application process, and having good credit is crucial for loan approval.
Debt-to-Income Ratio (DTI):
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Your DTI represents the percentage of your monthly income allocated towards debt payments. For most conventional loans, a DTI of 50% or lower is required.
Loan Size:
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Conforming conventional loans must adhere to the loan limits set by Fannie Mae and Freddie Mac. These limits change annually, with exceptions for high-cost areas.