Conventional Loan PlusWhat Is a Conventional Loan for a Home?
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The
term “conventional loan” refers to a mortgage that is not backed by
a government entity. FHA, VA, and USDA loans are guaranteed or
insured by the federal government.
The conventional loan, sometimes called a conforming loan, is not
federally insured. Conventional loans are provided to borrowers
indirectly through the Federal Home Loan Bank or Federal National
Mortgage Association (Fannie Mae). The following explains the
operation of conventional loans.
Fannie Mae and Freddie Mac are publicly listed companies that buy
mortgage-backed securities and resale them to investors. This allows
banks and other financial institutions to lend to a wider variety of
customers, since their capital is not tied to long-term debt.
Fannie
Mae and Freddie Mac have strict loan purchase requirements. A
conforming loan is a mortgage that conforms with the lending
criteria of Freddie Mac and Fannie Mae. It is common to hear the
terms conforming and conventional used interchangeably.
Fannie Mae and Freddie Mac have similar requirements for loan approval. Loans that do not comply or conform to conventional lending criteria are referred to as non-conforming loans. Non-conforming loans are often loans that exceed the lending cap set by the Federal Housing Finance Agency (FHFA).
Loan Terms
The conventional fixed rate mortgage has a loan term of 10, 15, 20, 25, and 30-years. Keep in mind that the monthly loan payment increases as the term decreases.
Does a conventional loan require mortgage insurance?
Many first-time home purchasers and homeowners seeking to
refinance their current mortgage are unable to make the 20% down
payment that is required by conventional financing.
Private mortgage insurance is the answer.
In exchange for a monthly payment, a private mortgage insurance
company will reimburse the lender for the difference between the
necessary 20% and the borrower's down payment in the case of a
foreclosure (or another mortgage insurance option).
After a
homeowner has built up a 22 percent equity position, private
mortgage insurance is no longer needed.
FHA, VA, and USDA all demand a one-time payment of mortgage
insurance at closing. The cost may be covered by the loan or paid at
the time of settlement.
Veterans who get a monthly disability
payment are exempt from the rule, according to the Veterans
Administration. Purple Heart recipients are now exempt from paying
the upfront mortgage insurance.
The initial mortgage insurance premium is not required for
conventional home loans.
Fixed and Adjustable Rate Loan Options
Fixed or adjustable rate conventional mortgages are
available. The benefit of a fixed rate mortgage is the
predictable payment each month. The homeowners' insurance,
property taxes, and other costs may increase, but the principal
and interest part of the mortgage payment never changes with a
fixed rate conventional mortgage.
Unlike a fixed rate mortgage, the interest rate on an adjustable
rate mortgage may change depending on the loan guidelines. One,
three, five, seven and ten year adjustable rate mortgages are
available.
The interest rate is fixed for the initial term of the mortgage
and can adjust after the introductory time period.
For example,
the 5-year adjustable rate mortgage is popular with home buyers
and homeowners who refinance their existing mortgage. The 5/1
ARM has a fixed rate for five years and following the 5th year
(60 payments), the interest rate could possibly change based on
the loan parameters.
Why would anyone take a mortgage with a
variable interest rate? The reason is that the 5/1 ARM has an
interest rate lower than the fixed rate, which allows the
borrower to purchase a more expense house or obtain a lower
monthly payment.
Conventional Loan Second Home
The government loans, FHA, VA and USDA do not finance second homes. The conventional/conforming mortgage will accommodate the purchase or refinance a second home. The down payment for a second home is only 10%.
Can I use a conventional loan to buy an investment property?
FHA, VA, and USDA lending programs do not provide
investment
mortgages. A conventional loan is your only choice if you're
interested in purchasing a genuine investment property, that is,
one that you intend to rent or sell but not live in.
Conventional loans require a down payment of 15% to 25%
(depending on the kind of property being purchased), and credit
score requirements are higher than those for government
programs. Only one to four unit dwellings are permitted.
What are conventional loan limits?
When you apply for a mortgage, you will discover that the
amount you may borrow is limited. This is decided on an
individual basis by your creditworthiness and the amount of
money you can afford to spend each month. The Federal Housing
Finance Agency establishes the
maximum loan amount
(FHFA).
The conforming loan limitations apply to all conventional
mortgages supplied by mortgage lenders to Fannie Mae and Freddie
Mac. These are consistent with the majority of the U.S.
counties, with a few exceptions for high-cost regions.
The
maximum loan limit for government backed loans is 65% of the
FHFA loan limit. It should be noted that USDA and VA home loans
do not have an established loan limit. The maximum ceiling is
determined by the lender.
Conclusion
In conclusion, a conventional loan is a loan that is not insured or guaranteed by the federal government. It is a loan that is offered by a private lender and is based on the borrower's credit score and income. A conventional loan can be used to purchase a home, refinance a mortgage, or for home improvement projects.