When it comes to financing the purchase of a home, various options are available to potential homebuyers. One common type of mortgage that many people consider is a conventional home loan. A conventional home loan is a type of mortgage that is not insured or guaranteed by a government agency. While government-backed loans like FHA (Federal Housing Administration) loans and VA (Department of Veterans Affairs) loans have specific eligibility criteria and guidelines, conventional loans are offered and backed by private lenders and follow guidelines set by two major entities: Fannie Mae and Freddie Mac.
How Conventional Loans Work
Conventional loans work like traditional mortgages, where a lender provides funds to a borrower to purchase or refinance a home. Here's an overview of how they typically operate:
Qualification: To qualify for a conventional loan, you'll need to meet certain credit score, income, and debt-to-income ratio requirements. Lenders typically prefer borrowers with good credit scores (usually 620 or higher), a stable income, and a manageable debt load.
Down Payment: Conventional loans typically require a down payment, which is a percentage of the home's purchase price. The down payment requirement can vary but generally ranges from 3% to 20% of the home's price. A larger down payment can lead to better loan terms.
Interest Rates: The interest rates on conventional loans can vary based on market conditions, your credit score, and the lender you choose. Borrowers with higher credit scores tend to qualify for lower interest rates, which can result in lower monthly payments.
Private Mortgage Insurance (PMI): If you make a down payment of less than 20% of the home's purchase price, you may be required to pay PMI. PMI protects the lender in case you default on the loan. Once you've built up enough equity in your home (usually 20% or more), you can request to have PMI removed.
Loan Limits: Conventional loans have loan limits set by Fannie Mae and Freddie Mac. These limits vary by location and are adjusted annually. Borrowers looking to finance properties that exceed these limits may need to consider other financing options.
Do you think a conventional home loan might be right for you? Let's set up a meeting to discuss options! Call me today.