A mortgage loan that is not insured, guaranteed or funded by the Veterans Administration (VA), the Federal Housing Administration (FHA) or Rural Economic Community Development (RECD / USRD) (formerly Farmers Home Administration). (as published in the glossary)
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What does that mean to you?
A conventional loan is a type of mortgage that allows for a borrower with good to excellent credit obtain a mortgage with different options and rates than what is offered by FHA, Rural Development and Veteran Affairs.
With down payment options as low as 3%, conventional loans can be a very cost effective way to get into a property. As a broker we have GRANT and down payment assistance options for approved borrowers that provide 2 – 4% of the loan amount to lower the cash required at closing! Long gone are the days of needing 20% in savings as a down payment to purchase a home.
When securing a conventional loan with less than 20% down you will hear the term mortgage insurance come into the scenario. On a conventional loan there are different ways mortgage insurance can be paid, most commonly added to your monthly payment. A monthly premium established by the lender and mortgage insurance company is added to your payment and is set to remain until the equity reaches a certain threshold where it would be removed. Other options include a single payment premium at closing, a lender paid mortgage insurance premium, or split premiums that are a combination of the different options.
The term mortgage insurance often has a bad implication BUT it offers a borrower the opportunity to purchase a home with as little as 3% down (or less when grants or down payment assistance is applied). If this was not an option, as someone purchasing a home, you would have to save 20% of the sales price to put down before you could get a conventional loan. When purchase prices were $50,000 this was favorable but now when your first home often cost $150,000 or higher the idea of bringing 20% to the closing table is unreasonable.
Mortgage insurance is not only charged on Conventional loans. Both FHA and Rural Development have a premium paid per month that is in the same vein as conventional mortgage insurance. If you want more information on those loan types please visit those featured loan type pages here – FHA / Rural Development.
Benefits of a conventional loan –
- Conventional loans offer competitive rates. The rates are based on the current market pricing and determined by a combination of your credit score, the property type, occupancy, the term of the loan, and the down payment percentage (or percentage of equity if you are considering a refinance). Other factors may also apply but typically
- Conventional loans offer purchase and refinance options for investors who do not intend on occupying the subject property.
- Conventional loans offer financing options to homeowners who own or want to purchase second homes.
- Property types up to 4 units are considered eligible for conventional loans. Down payment requirements differ as the number of units increase.
- Conventional loans offer mortgage insurance that is automatically removed at a certain equity threshold. Other programs require mortgage insurance for the life of the loan.
- Conventional loans offer borrowers the option to opt-out of establishing an escrow account for future insurance and tax payments. This is an option if you have 20% equity in the property and the minimal credit score required per the lenders guidelines. This does not remove the requisite of maintaining homeowners insurance or flood insurance (if required).
Common Terms you will hear with this loan type:
- Fannie Mae (FNMA) and Freddie Mac (FHLMC) – Both of these are stock holding companies that buy mortgage loans from lending institutions and secure them for resale to the investment community. Buying back mortgage loans allow these agencies to provide a continuous flow of affordable funding to banks that reinvest their money back into more mortgage loans. This does not affect the servicing of the loan (who you as the borrower mail payments to) just the lending company’s ability to finance new loans.
- Fixed Rate / ARM / Interest Only - these terms are important to understand when determining your overall mortgage payment. A fixed rate will have a fixed interest rate over the life of the loan. An ARM loan refers to an Adjustable Rate Mortgage. A loan with an Interest Only option allows you to pay the interest being charged without paying anything towards the principal balance of the loan for a predetermined amount of time. These are all different options available on a conventional mortgage. At LA Lending we always present Fixed Rate Mortgages unless otherwise requested by the client OR we feel another product would be more beneficial given the situation.
- Conforming – Sometimes used interchangeably with the term conventional. Also refers to the applicable loan limits. Loan amounts that are higher than the limits mentioned below are referred to as Non-Conforming OR Jumbo Loans.
|# of Units||Loan limitations in Louisiana|
Why choose a Conventional loan over a different loan type –
There are many reasons to consider when deciding which loan type is right for you. LA Lending would be happy to work up several options and present them to you. We help you make the right choice for your situation. We utilize Mortgage Coach© software to easily present various loan options to you so you can make an informed choice when deciding on a mortgage.
Common concerns are:
- What is the overall finance charge on each various loan type over the life of the loan? This includes mortgage insurance and the interest paid over the entire term.
- What is total amount needed at the closing table? This consists of the down payment and the closing cost on the loan.
- What interest rates are available to me, with my credit score, my available funds for a down payment, and my property type? Property type refers to a single family residence, a multi-unit property, a town house, condominium, etc.
**Loan specifics listed here are just for informational purposes and are not to be used to replace a consultation with a licensed mortgage professional.
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