Conventional Loans Video transcript
Hello ladies and gentlemen. This is mortgage Mario reporting live with your mortgage topic of the day. I hope everyone is having a wonderful week and is staying safe out there. So let’s dive right into the nitty-gritty and discuss conventional loans.
Conventional mortgage loans are found on the Fannie Mae secondary mortgage market. Fannie Mae is not backed by a government agency but confusingly enough conventional loans are considered a government-sponsored enterprise. Conventional loans come into two different categories, conforming and non-conforming loans.
Conventional loans function by being originated and serviced by private financial institutions such as banks, financial institutions, and credit unions. As a good rule of thumb, conventional loans have stricter guidelines than government loans such as higher credit score and lower debt to income ratio or DTI for short.
Generally, borrowers will need at least a 640 credit score and a debt to income ratio of 40% or below to qualify for conforming to conventional loans. For borrowers with lower credit scores, there are other mortgage products with lower credit score requirements, such as FHA loans. Interest rates for conventional loans depend largely on the applicant’s credit score and credit history. The higher the credit score the lower the interest rates because lenders will categorize borrowers with high credit scores as lower risk vs low credit score borrowers.
For this very reason, you need to maintain a healthy credit score so you can secure the best possible interest rate and save some serious cheddar.
Down payment for conventional loans can be low as 3% for first-time homebuyers. Typically though, the minimum down payment for a conventional loan is 5%. Please take note that if you don’t put down 20% percent then the lender requires you to pay private mortgage insurance or PMI for short. PMI protects the lender in the event the borrower defaults on their loan before 80% loan to value. When at an LTV above 80% borrowers also have the option to break down PMI into monthly PMI or upfront PMI. When putting down 20% isn’t an option, then paying an upfront PMI potentially could save a borrower a boatload of money when compared to monthly PMI. Take note when deciding between upfront and monthly PMI, it is largely dependent on how long the homebuyer lives in the house. So when you are uncertain about your duration of stay then you are probably better off going with PMI monthly. Also the second lean of position mortgage products like piggyback financing can be a way to bypass PMI without having to put down 20%.
Most people secure 30-year conventional loans but there are conventional loans with shorter terms such as 15 or 20-year conventional loans. When cash flow isn’t as much of a concern, then executing on a 15-year loan can save a borrower thousands of dollars in interest over the life of a loan. Remember though this is due to the principle that a dollar today is worth more than a dollar tomorrow.
As of 2021 in Georgia, the maximum conforming loan amount is $548,250 for a single-family home. In higher-cost areas of the country, the limit can be much higher.
If a borrower needs access to more capital, then loan products such as Jumbo conventional loans are a viable option. Keep in mind due to the added risk to the lender, jumbo loans require a much higher credit score (typically around 770 and up) vs a conforming conventional loan. Jumbo loans also require lower debt to income or DTI and usually require a higher down payment amount. With all of that said jumbo loans usually have higher interest rates than conforming loans. Again the higher the interest rate the bigger the risk there is for the lender.
Portfolio loans are conventional loans that provide more lenient underwriting than conforming loans and are an option for borrowers who have lower credit scores and high DTI. However, portfolio loans don’t offer as much protection and come with higher interest rates. In many cases, a borrower probably would be better off investigating an FHA or USDA loan if applicable.
Subprime conventional loans require a lower credit score and DTI of below 50%. Although they are easier to qualify for interest rates are much higher than a conforming loan.
Amortized Conventional loans have a fixed interest rate and payment throughout the loan. At the beginning of an amortized loan, the borrower pays more interest but then starts paying more towards principle as the life of the loan increases. Fixed rates make complete sense during times of lower than average interest rates.
Adjustable conventional loan interest rates fluctuate through the life of the loan with interest rates being dependent on the current market rates. ARM loans can certainly be a gamble but if you are only going to be in the house for less than a few years or you think interest rates will drop, then an ARM loan can be an option to consider.
Some advantages and major benefits of conventional loans can be low-interest rates, higher loan limits, and more flexibility.
Some disadvantages of conventional loans are stricter credit score guidelines when compared to government-backed loans.
Higher down payment amounts vs FHA which is a down payment requirement of 3.5% when the borrower has at least a 580 credit score. VA loans and USDA don’t even require a down payment. So when cash flow is a concern then conventional loans can be more challenging to qualify for.
To successfully secure a conforming conventional loan, it is essential to maintain a high credit score, low DTI, save for the down payment, and get pre-approved by a mortgage loan officer. It is wise to get pre-approved before you start the home shopping process. A pre-approval letter also can enhance your chances of a seller accepting your offer. Pre-approvals are typically valid for 90 days.
It was a pleasure having the honor of presenting the mortgage topic of the day. Until next time this is mortgage Mario signing out, stay classy everyone!