Conventional Financing for Your Home Purchase

Conventional Financing for Your Home Purchase A home purchase is a big deal. It is probably the largest transaction you’ll ever make in your lifetime. With so many types of financing available, it can often be hard to choose or know which type best meets your needs.

As great as many of the government-backed programs are, many individuals aren’t eligible and must go with conventional financing.

Here is an overview of conventional financing and what it entails.

What Are Conventional Loans?

Conventional mortgage loans are loans that are not guaranteed or insured by the government or a government program. Conventional loans are also known as conforming loans. This is because they must conform to the guidelines set by mortgage industry leaders Freddie Mac and Fannie Mae.

Freddie Mac and Fannie Mae purchase mortgages from qualifying lenders. They are then sold on the open market to other banks and lenders. This helps those lenders gain more capital to be able to provide more loans for home purchase.

Conventional loans come from banks, credit unions, and similar private lending institutions. They can be adjustable-rate or fixed-rate mortgages and may have terms from 10 years to 30 years. Freddie Mac and Fannie Mae set guidelines in the following areas.

  • Type of home purchase
  • Amount of income of the borrower
  • Credit scores
  • Maximum loan amount
  • Required documentation from the borrower
  • Debt-to-Income (DTI) ratio guidelines

Conventional Loans vs Non-conventional Loans for Home Purchase

Conventional loans are not guaranteed by government agencies such as the Federal Housing Administration or Department of Veteran Affairs. When a non-conventional loan is guaranteed or backed by the government, it means that the government agency agrees to pay the lender in the case that the borrower defaults on the loan.

Conventional loans must adhere to the various guidelines set by Freddie Mac and Fannie Mae. Conventional loans require a down payment that may be up to 20 percent. On a conventional loan, the borrower must have a DTI that does not exceed the bank’s requirements.

Conventional Loan Requirements

Because conventional loans are not backed by the government, they are riskier for banks and lenders and, therefore, have stricter requirements. To be eligible for a conventional loan for a home purchase, the borrower must typically meet the following requirements.

  • Must have a down payment of up to 20 percent
  • Credit scores must be around 600 or higher.
  • The borrower must meet the lender’s minimum income requirements.
  • Borrower’s DTI must not exceed the lender’s DTI maximum, which is usually about 43 percent.
  • Loan amount must not exceed the guidelines. In most cases, the maximum is $424,100.
  • Private mortgage insurance may be required depending on the LTV (loan-to-value ratio).

Advantages of Conventional Loans

Below are some of the advantages/pros of conventional loans.

  • Private mortgage insurance is cheaper than with non-conventional loans.
  • There is no PMI required upfront on conventional loans.
  • When mortgage insurance is required, it can be eliminated when the LTV reaches 78 percent of the home’s value.
  • There is no down payment required if borrower puts 20 percent down, which can come by way of the home’s value. For instance, if the loan amount is less than 80 percent of the home’s value, that amount can be equivalent to the down payment.
  • Home buyers can borrow up to $424,100 or $625,500 in higher cost areas.
  • The home can be found in almost any area.

 

Sitemap

Please follow and like us:

2018 Increase in Mortgage Loan Limits in Arizona

Have you heard about the three major changes  in mortgage loan limits affecting our housing market?

Mortgage loan limits in AZ have gone up for 2018 across the board on Conventional, FHA, and VA. Here’s the great news…

  1. FHA Loan limits have recently increased from roughly $279,000 all the way up to $294,515, expanding the housing market and the opportunity for you to find the perfect home.
  2. Conventional Loan limits have gone all the way up to $453,100. Why is that a big deal? Previously, if you were above $424,000, you would have been forced into the jumbo financing arena. Now this is not the case – once again allowing you to finance more and perhaps find that perfect home for you.
  3. VA Loan limits have also followed suit with regards to conventional financing, allowing a veteran to finance as much as $453,100 with no money down and no private mortgage insurance required. This makes VA Loans some of the most, if not the most, competitive financing terms available for Veterans in the housing market.
Please follow and like us:

Pros and Cons – Conventional Loan or FHA Loan?

Purchasing a home is probably the largest purchase you’ll ever make in your lifetime, so you want to get the best possible mortgage loan terms.

If you’re new to the mortgage loan process, you may be wondering whether an FHA loan or a conventional loan would be best for you. Below is info on both types of loans as well as pros and cons of each.

Difference Between FHA and Conventional Loan

While FHA and conventional loans both involve obtaining financing from lenders to purchase or refinance homes, there are slight differences between the two.

Conventional loan are mortgage loans a homebuyer or potential homebuyer gets from banks, credit unions or private lenders.

In exchange for the loan, the individual makes monthly payments that include both the principal amount and interest.

If the borrower fails to make the payments, the homeowner can lose the home through foreclosure. Both the lender and the borrower can lose their investment.

FHA loans are also mortgage loans that provide the homebuyer with money to purchase a home.

However, one major difference is that FHA loans are backed or guaranteed by the Federal Housing Administration.

With an FHA-backed loan, the lender is required to purchase mortgage insurance, which guarantees that the lender will not lose their investment if the borrower fails to make the payments.

Pros and Cons of FHA Loans

Pros

  • Lower down payment required
  • More lenient credit score requirement – consumers can get an FHA loan with credit scores as low as 580.
  • Cash and monetary gifts can be used for down payment
  • Homebuyers who previously lost their homes to foreclosure can still get an FHA loan after improving their credit scores.
  • Seller can provide up to six percent of the money for closing costs.
  • FHA loans allow individuals not living in the home to be co-borrowers.
  • Allow refinancing with lower equity amounts
  • The government backs the loan

Cons

  • Requires both monthly mortgage insurance and an upfront mortgage insurance premium.
  • There is a limit of how much a consumer can borrow based on the location of the home.
  • Mortgage insurance is much more expensive than private mortgage insurance that might be required with a conventional loan.
  • The borrower may end up paying more over the life of the loan because of the lower requirements.

Pros and Cons of Conventional Loans

Pros

  • Mortgage insurance usually not required
  • More economical for borrowers with good credit scores
  • Borrowers may pay less over time due to no mortgage insurance requirement.
  • Loan fees can be negotiated.

Cons

  • Stricter credit score requirement – Consumers must typically have credit scores of at least 600.
  • Higher down payment is required.
  • Sellers may help with closing costs but usually only up to three percent of the amount.
  • They require a certain debt-to-income ratio.
  • Because the lender determines interest rates, they can be higher than with an FHA loan.
  • More criteria goes into determining eligibility if borrower can’t pay at least 20 percent down payment.

What About VA Loans?

Veterans and military personnel also have the option to purchase a home with the help of a VA loan. A VA loan is a mortgage loan that’s backed by the Department of Veterans Affairs. These loans also come with several benefits, including the following.

  • No mortgage insurance required
  • No down payment required
  • Lower interest rates
  • Mortgage is assumable
  • No cap on the amount the homebuyer can borrow

 

 

Sitemap

 

Please follow and like us: