Conventional Mortgage Topics Covered
- What is a Conventional Mortgage?
- Conventional Mortgage Requirements
- Private Mortgage Insurance (PMI) on a Conventional Mortgage
- Types of Conventional Mortgages
- Conventional Mortgage Advantages
- Conventional Mortgage FAQs
What is a Conventional Mortgage?
A conventional mortgage is one that’s not guaranteed or insured by the federal government. Instead, they are available through private lenders, such as banks, credit unions, and mortgage companies.
Conventional mortgages have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. This gives California homebuyers a sense of stability that is not present in the case of, say, an adjustable-rate mortgage. Interest rates for conventional loans tend to be lower than rates for FHA loans yet higher than those of VA loans.
Conforming conventional loans must fall within the limits set by Fannie Mae and Freddie Mac. As of 2020, the limit is $510,400. If the loan surpasses that limit, it becomes a jumbo (nonconforming) loan.
Usually, you’ll be able to borrow more money on a conventional loan than on a FHA loan.
Potential California borrowers must complete an official mortgage application (and usually pay an application fee), then supply their lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.
Conventional Mortgage Requirements
Documentation Needed to Get a Conventional Mortgage
- Proof of income and assets.
- Employment verification.
- A driver’s license/state ID card.
- A valid social security number.
- Have a FICO credit score of at least 620 (this number may vary from lender to lender).
- Make a down payment.
- Have a debt-to-income (DTI) ratio of less than 50%. This means that your total monthly debt payments can’t be more than 50% of your pretax income (includes debts that you aren’t actively paying).
- In the case of a conforming conventional loan, your loan must fall within the limits set by Fannie Mae and Freddie Mac.
The requirement for a down payment can vary based on your personal circumstances and the kind of loan or property you’re getting. First-time home buyers in California have the possibility of acquiring a conventional mortgage with a down payment as low as 3% through financial assistance programs.
- If you’re not a first-time home buyer, the down payment requirement is 5%.
- If you’re a second-time home buyer, the requirement is 10%.
- With an adjustable rate mortgage, you need to put down at least 5%.
- In the case of a jumbo loan, the down payment requirement ranges from 10% to 40%.
- If you’re not buying a single-family home, you may need to put down 15%.
Private Mortgage Insurance
If you choose to make a down payment of less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI), which protects your lender in case you default on your loan. This is different from FHA loans, where you have to pay an upfront mortgage insurance premium (UFMIP) and an annual MIP.
Your PMI is typically included as part of your monthly mortgage payment, but there are other ways to cover the cost as well. There’s the option to pay it as an upfront fee, or, alternatively, in the form of a slightly higher interest rate.
When you reach 20% equity on your home, you can ask your lender to remove the PMI from your mortgage payments. Once you reach 22% equity, though, the PMI will automatically be removed.
Different Types of Conventional Mortgages
- Conforming – meets loan standards set by Fannie Mae/Freddie Mac. For clarification: the FNMA (Fannie Mae) and the FHLMC (Freddie Mac) are home mortgage companies created by the U.S. Congress. They make the mortgage market more affordable and stable, and they provide liquidity to thousands of loans, banks, and mortgage companies in America.
- Nonconforming – (like a jumbo loan, for example) doesn’t meet the loan standards set by Fannie Mae/Freddie Mac. Oftentimes, jumbo loans require a higher credit score than conforming ones do.
- Fixed Rate – for as long as you have the mortgage, the interest rate will remain the same.
- Adjustable Rate – (also referred to as hybrid ARMs) rates change annually, after staying fixed for a set amount of years.
- Amortized – there is a set monthly payment from the beginning to the end of your loan repayment period, without a balloon payment (these can have either fixed or adjustable rates).
- Low Down Payment – more flexible than other types; you can get a down payment as low as 3 or 5 percent.
- Portfolio – the lender chooses to keep the loan in its own portfolio as opposed to selling it on the secondary market. These are good if you have a high DTI or a low credit score but are still able to afford something with a higher interest rate.
- Renovation – allows you to finance a house while also paying for renovations (good if you’re buying a fixer-upper).
Advantages of Getting a Conventional Loan
- The interest rates tend to be lower.
- There are more options in terms of down payment.
- Overall, these loans can be very flexible as most of them don’t need to follow the guidelines set by government agencies.
Frequently Asked Questions
What types of homes can I purchase with conventional financing?
Conventional loans allow you to purchase single family homes, condos, investment properties, townhomes, lofts and 2nd vacation homes.
How much can the seller pay towards my closing costs?
Typically the seller can pay 3% of the sales price towards closing. If you put a down payment over 10% they can pay up to 6% towards your closing. This is assuming that your home purchase is for a primary residence. Investment properties are capped at 2% allowable seller paid closing costs.
If my credit score is low, how can I raise it?
Paying your bills on time, reducing your credit balances, and trying to not apply for credit too often are all ways that you can raise your FICO score.
How long does it take to purchase a home?
The normal turn time for a purchase is about 30 days. This 30-day window also assumes you have all your documentation available, provide accurate and verifiable information on your mortgage application and remain diligent in honoring the additional documentation requests that, inevitably, come from underwriting.
Keep in mind that your personal financial situation will probably be closely scrutinized when acquiring a conventional mortgage; this is because loans like these are often riskier for lenders to originate than other types of loans. Due to conventional loans being harder to obtain, they typically aren’t very popular among first-time homebuyers in California.
If your credit score is in good shape and you can afford to make the required down payment, then a conventional mortgage might be the right choice for you. If not, consider getting a government-insured mortgage instead.Questions? Contact Patrick Taba Today!