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Realtor / Broker / MBA
Mark K. Hicks
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Conventional Loan Overview: Traditional Home Financing
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What is a Conventional Loan?
A conventional loan is a type of mortgage that is not insured or guaranteed by the government. It’s typically offered by banks, credit unions, or other private lenders. It’s ideal for buyers with strong credit, a solid financial history, and the ability to make a larger down payment.
Advantages of Conventional Loan
Lower Mortgage Insurance Costs
With a 20% down payment, conventional loans often avoid mortgage insurance or have lower premiums compared to FHA loans.
Details
Advantage
Flexible Loan Terms
Conventional loans typically offer fixed-rate and adjustable-rate options with flexible term lengths, like 15, 20, or 30 years.
Higher Loan Limits
Competitive Interest Rates
Conventional loans can allow for higher loan amounts compared to government-backed loans (e.g., FHA), especially in high-cost areas.
No Upfront Mortgage Insurance
Unlike FHA loans, conventional loans typically don’t require upfront mortgage insurance (UFMIP), reducing initial costs.
Easier to Eliminate Mortgage Insurance
Once you reach 20% equity in the home, you can request removal of private mortgage insurance (PMI), unlike FHA loans where the insurance may last for the life of the loan.
Flexible Property Use
Conventional loans are more flexible in terms of the property types they can be used for, including investment properties, second homes, and multi-unit homes.
Conventional Loan Guidelines
Details
Guideline
Credit Score
Minimum credit score of 620 is typically required, though higher scores may be necessary for better terms and lower interest rates.
Down Payment Requirements
3% down for first-time homebuyers or 5% down for others. 20% down to avoid private mortgage insurance (PMI).
Debt-to-Income (DTI) Ratio
DTI ratio up to 43% or higher depending on the lender’s specific requirements.
Mortgage Insurance
Required if the down payment is less than 20%. It’s typically private mortgage insurance (PMI), and can be canceled once 20% equity is reached.
Property Standards
The property must meet conventional lender-approved standards, but generally doesn’t require an FHA-style safety inspection.
Loan Limits
Conventional loan limits are typically higher than FHA, with limits varying by region, but usually ranging between $500,000 - $1 million for high-cost areas.
Primary Residence or Investment Property
Conventional loans can be used for primary residences, second homes, or investment properties, offering more flexibility than FHA loans.
Conventional Lender
You must work with a conventional-approved lender to secure this type of loan.
Is a Conventional Loan Right for You?
Best For
Conventional loans are ideal for borrowers with a strong credit history, the ability to make a larger down payment, and those seeking more flexible loan terms.
Main Benefits
Lower mortgage insurance costs, higher loan limits, and the potential to eliminate mortgage insurance once equity is built make it a great choice for qualified buyers.
Considerations
Borrowers need good credit and may have higher down payment requirements, especially if seeking lower interest rates and to avoid PMI.
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