Conventional Loans

What is a Conventional Loan?

A conventional loan is a mortgage that is originated and funded by private lenders such as banks, credit unions, and mortgage companies. It is a type of loan that is not insured or guaranteed by the government. In other words, the lender assumes the risk of the loan instead of the government. A conventional loan can be used to purchase or refinance a home or investment property. It is important to know that there are two types of conventional loans: conforming and non-conforming loans.

Who is Eligible for a Conventional Loan?

To be eligible for a conventional loan, you will need to meet certain criteria such as having good credit, a stable income, and a low debt-to-income ratio. The exact requirements vary and depend on the type of conventional loan you are applying for. Typically, borrowers will need at least a credit score of at least 620, although it may require a higher score. You will also need to provide proof of income, which can include pay stubs, W-2s, and tax returns.

What are the Benefits of a Conventional Loan?

One of the main benefits of a conventional loan is that it allows you to borrow more money than government-backed loans. This is because there are no limits on the loan amount, unlike FHA loans, which have maximum loan limits based on the area you live in. Another benefit is that conventional loans usually have lower interest rates than government-backed loans, which can save you thousands of dollars over the life of the loan. Mortgage insurance is not mandatory with conventional loans if you put down at least 20% of the purchase price of the home, saving you hundreds of dollars in monthly mortgage payments.

What are the different types of Conventional Loans?

The most common type of conventional loan is a fixed-rate mortgage, which offers stable monthly payments over a set interest rate for the life of the loan. Another popular option is an adjustable-rate mortgage, which offers lower initial interest rates that can adjust up or down over time. Many borrowers also choose to take advantage of jumbo loans, which are designed for higher-priced homes that exceed the conforming loan limits of a traditional mortgage.

3% Down Payment Options for First-Time Buyers

With the Home Possible and HomeReady loan programs, qualified first-time buyers can enjoy the benefits of a conventional loan with a significantly reduced down payment requirement. These programs are ideal if you’re looking to minimize upfront costs while still securing a mortgage with favorable terms.

Home Possible Loan Program

The Home Possible loan, offered through Freddie Mac, is designed to help low to moderate-income buyers afford a home with a 3% down payment. Here are some of its key benefits:

• Low Down Payment: As little as 3% down for qualified buyers.
• Competitive Interest Rates: Helps you save on monthly mortgage payments.
• Flexible Income Requirements: Allows for non-traditional sources of income and co-borrowers.
• No Credit Score Minimum: Flexible guidelines for credit history, making it easier for more buyers to qualify.
• Reduced Mortgage Insurance: Potential for lower private mortgage insurance (PMI) costs compared to other conventional loans.

HomeReady Loan Program

The HomeReady loan, offered by Fannie Mae, is another excellent option for first-time homebuyers, especially those with moderate income. This program offers:

• 3% Down Payment: Accessible with just a 3% down payment, lowering upfront costs.
• Income Flexibility: Accepts non-borrower income to help meet qualifications, making it easier to apply with household support.
• Lower Mortgage Insurance: Reduced PMI requirements, which can be canceled once you reach 20% equity.

If you have any additional questions, be sure to contact Connor Lanigan - Thompson Kane to see if a conventional loan is the right choice for you.