Now with a maximum loan amount of $453,100, conventional borrowers seek this program, its Lower Interest Rates, and Increased Options.
A conventional loan benefits you when you have good, but not necessarily perfect, credit history and are popular due to low rates and increasingly flexible guidelines. Putting down a larger amount means that the monthly mortgage costs will be less on a conventional loan. A down payment of at least 20 percent will eliminate mortgage insurance, a requirement of the FHA and USDA loans even with a large down payment.
If you have good credit and stable income, a conventional loan might be the right option for you since it offers:
- Lower interest rates for borrowers with good credit
- Flexible mortgage insurance options
- Fewer penalties and fees
- Flexible loan terms
- Higher maximum loan amounts
What is a conventional loan?
A conventional mortgage refers to any loan that is not insured or guaranteed by the federal government, as opposed to government-insured loans including Federal Housing Administration (FHA), U.S. Department of Veteran Affairs (VA) and U.S. Department of Agriculture (USDA). Conventional mortgages (whether conforming or not) typically have a slightly higher down payment than government loans; however, this loan option normally provides more flexibility with fewer restrictions. Conventional loans are also known as conforming loans because they "conform" to Fannie Mae and Freddie Mac standards.
It’s a myth that you need a 20 percent down payment for a conventional loan. Smaller down payments as little as 3% can now be used...
It’s a myth that you need a 20 percent down payment for a conventional loan. Smaller down payments as little as 3% can now be used with programs like HomeReady and the Conventional 97 loans. Conventional low-down payment options not only exist but are extremely popular with today’s buyers. The drawback to a 3% down loan is that the interest rate may be higher to compensate for the smaller amount down. Mortgage insurance may be more expensive as well, as compared to a five- or ten-percent down conventional loan. Mortgage insurance is not a waste of money. Because of mortgage insurance, renters can more easily transition into homeownership. Mortgage insurance makes low-down payment loans possible on a conventional loan.
All you do to qualify for a conventional loan is simply meet the expectations set out by Fannie Mae and Freddie Mac.
What are conventional mortgage advantages?
Like most loans, you have an option about how long you will be paying your mortgage. Conventional loans come in 15, 20, 25, and thirty-year terms. Scissortail Financial Home Loans even offers a 10-year term to accelerate paying off your mortgage. The shorter your loan term, the lower your rate and the higher your monthly payment. Fortunately, a loan term of 30 years still comes with low fixed interest payments that help home buyers budget and cover the other costs of home ownership.
Conventional loans are also a smart choice for those who know they won't remain in their house long and want a shorter-term, adjustable-rate mortgage. This option comes with a lower interest rate than that of a fixed-rate loan. Adjustable rates are in fact fixed, but only for a period of time – usually 3, 5 or 7 years. During that initial period, the homeowner pays a lower interest rate and can save thousands in interest. The risk here is that if you don't sell or refinance by the end of the initial term, the rate adjusts -- maybe down, but also maybe up. It's a gamble that needs to be discussed before selecting this option.
Another advantage to conventional loans is the lack of an upfront mortgage insurance fee, even if the buyer puts less than 20 percent down. FHA loans, plus USDA mortgages and even VA loans require an upfront “funding fee” usually between 1% and 3% of the loan amount. Conventional loans only require a monthly mortgage insurance fee, and only when the homeowner puts down less than 20 percent. Plus, that mortgage insurance cost is often lower than that of government-backed loans.
In some ways, Conventional loans are less restrictive compared to other loan types.
USDA loans require the property purchased to be in a designated rural area. This is fine for those who live and work in suburban and rural locations. However, for those in major cities, a USDA-eligible home could extend commuting distance beyond what is reasonable.
VA loans are exclusive to current and former military service members. They offer a lot of benefits, like zero down payment and no monthly mortgage insurance. But they are not available to the general population.
FHA loans are a powerful home buying tool, but can come with high upfront and monthly mortgage insurance fees that are payable for the life of the loan -- up to 30 years. The only way to cancel FHA mortgage insurance is to refinance out of the FHA loan. This can incur additional costs.
Today's conventional loan rates
Conventional loans come with low rates that make home buying affordable.
Rates are based on mortgage backed securities (MBS) which are traded just like stocks. And like the stocks, conventional loan rates change daily, and throughout the day. Conventional loan rates are heavily based on credit score, more so than rates for FHA loans. Fannie Mae and Freddie Mac publish Loan Level Price Adjustments which increase interest rates for lower-credit-score buyers. This is why an FHA loan is often more suitable for these applicants. Locking a rate is available to any approved applicant who has selected a property to buy. What's the best way to secure a low rate? Watch market movements so you know a good rate when you see one.
It's important get a personalized rate quote. Published rate averages are often based on the "perfect" applicant -- one with great credit and a large down payment. Your rate might be higher or lower.
Get a conventional rate quote to based on your information, not on that of a “teaser” buyer.