If you're in the market for a mortgage, you may have heard the term "conventional mortgage loan" being thrown around. But what exactly does this mean? Well, simply put, a conventional mortgage loan is a type of home loan that is not backed by the government. Unlike government-backed loans such as FHA loans, conventional loans are funded entirely by private lenders.
Conventional loans can be broken down into two main categories: conforming loans and non-conforming loans. Conforming loans adhere to certain guidelines set forth by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These guidelines typically include things like maximum loan amounts and credit score requirements. Non-conforming loans, on the other hand, don't meet these standards and are often referred to as jumbo loans because their size exceeds conforming loan limits.
General conventional loans are a common option for qualified buyers looking to purchase a home before March 31 2023 with lenders funds. While they may come with stricter credit requirements than some government-backed loans, they also tend to offer more flexibility when it comes to things like down payments and interest rates. In short, if you're looking for a versatile mortgage option that doesn't involve any government red tape, a conventional mortgage might just be the way to go.
How Is A Conventional Mortgage Different Than Other Loan Types?
Conventional loans compare to other popular loan options in several ways. Unlike government-backed loans such as FHA, VA, or USDA, conventional mortgages are not insured by the government. This means that lenders carry more risk with these types of loans and may require higher credit scores and larger down payments from borrowers. However, conventional mortgages offer more flexibility in terms of property types and loan amounts, making them a great option for many homebuyers.
1. Conventional Loans Vs. FHA Loans
If you're deciding between a conventional loan versus an FHA loan, there are a few things to consider. Conventional loans offer stricter credit requirements and slightly smaller down payment credit scores, while FHA loans from the Federal Housing Administration offer more lenient credit score requirements and lower down payments. However, with an FHA loan, you'll have to pay mortgage insurance premium throughout the life of your loan, whereas with a conventional loan, you may have to pay private mortgage insurance until you've reached 20% equity in your home.
2. Conventional Loans Vs. USDA Loans
When it comes to loan options for purchasing properties in qualifying rural areas, conventional loans and USDA loans are the two main options. While conventional loans have varying income limits and may require borrowers to pay private mortgage insurance (PMI), USDA loans don't require borrowers to pay PMI and have a maximum income limit based on the area you're buying in. Additionally, USDA loans come with a guarantee fee that can be rolled into the total loan amount, resulting in a more affordable loan compared to conventional loans. It's important to note that Rocket Mortgage doesn't offer USDA loans.
Choosing Between Traditional and Standard Mortgages
When shopping for a mortgage, it is important to understand the different types of loans available. Conventional mortgages are often erroneously referred to as traditional mortgages, but they actually fall into two distinct categories: conforming and non-conforming. A conforming mortgage is a conventional loan that meets the funding criteria set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy mortgages on the secondary market. The underlying terms and conditions meet the dollar limit set annually by the Federal Housing Finance Agency (FHFA) for the continental United States.
Conforming loans have become extremely large in recent years, with over 83 million homeowners holding these loans. Conventional loans qualify for purchase by Fannie Mae and Freddie Mac, so lenders can sell them in the well-established forward market or as pass-through mortgage-backed securities (MBS). In addition to MBS, there is also an announced TBA market for conventional pass-through securities and collateralized mortgage obligations (CMOs), which offer investors additional options.
While conventional mortgages are often easier to obtain than FHA-insured mortgages, jumbo mortgages are still an option for those who need more money than a conventional loan can provide. These loans are not backed by Fannie Mae or Freddie Mac but can be sold on the secondary market to investors who are willing to pay a premium price for their higher risk. Ultimately, choosing between traditional and standard mortgages comes down to your financial situation and your long-term goals.
Essential Papers Needed for a Traditional Home Loan
When it comes to getting a traditional home loan, there are some basic requirements that haven't changed for potential borrowers since the subprime mortgage meltdown of 2007. First and foremost, you'll need to fill out an official mortgage application and pay the application fee. From there, you can expect an extensive check into your background credit history and current credit score, as well as a review of your gross income to ensure you can afford monthly mortgage payments.
Along with these up-front costs, you should also be prepared for loan origination fees, underwriting fees, broker fees, and closing costs - all of which can significantly drive up the overall cost of your mortgage. To make sure you're fully prepared for this process, it's important to know which items are required before applying for a traditional home loan. By gathering all the essential papers needed, including proof of income and employment, bank statements from the past few months, and tax returns from the previous year or two, you can increase your chances of securing a competitive interest rate and favorable repayment terms.
1. Proof of Income
When applying for a conventional mortgage, lenders will require proof of income. This means providing pay stubs from the last thirty days, year-to-date income, federal tax returns from the previous two years, and quarterly statements from asset accounts including checking and savings, investment accounts, and any other additional income. It's important to gather all of these documents within sixty days to ensure a smooth application process. W-2 statements may also be required depending on your employment status.
2. Assets
When applying for a conventional mortgage, your assets play a significant role in the approval process. Lenders want to see present bank statements and investment account statements to determine if you have enough cash reserves to cover closing costs and obligatory repayment. If you receive money as a gift, be sure to provide gift letters to prove it's not a loan. Having strong assets can increase your chances of getting approved and make the home buying process smoother.
3. Employment Verification
In order to qualify for a conventional mortgage, lenders today require employment verification. This means that borrowers must show a stable work history and provide pay stubs as proof of income. If you have recently changed jobs or are self-employed, previous employer information and significant additional paperwork may be required. It's important to prepare yourself before applying for a conventional mortgage by making sure all necessary documentation is in order.
4. Other Documentation
Other documentation needed for a conventional mortgage includes your driver's license or state ID card, social security number, and a signature allowing the lender to pull your credit report. These documents help lenders verify your identity and creditworthiness, so it's important to have them ready when you're applying for a mortgage. Keep in mind that specific lenders may require additional documentation, so it's always best to check with them directly.
Get a Better Grasp of Conventional Mortgages and Loans
Conventional mortgages typically refer to loans that are not backed by the federal government. These loans can come with a fixed rate or an adjustable interest rate, and as a result, typically come with stricter lending requirements than government-backed mortgages. While conventional mortgages may offer low closing costs and favorable terms for borrowers, they are also more difficult to secure than government-backed loans.
There are several types of loan conventional mortgages available, including those from the Federal Housing Administration (FHA), Veterans Affairs (VA), and the Agriculture's USDA Rural Housing Service. Each of these government agencies offers its own set of benefits and requirements for borrowers looking to secure mortgages. By understanding the differences between these types of loans, borrowers can make informed decisions about which mortgage is right for their unique financial situation.
The Key to Unlocking a Conventional Loan: Your Credit Score
The key to unlocking a conventional loan is your credit score. When it comes to obtaining a conventional mortgage, your credit score is one of the most important factors that lenders consider. Fannie Mae, the largest purchaser of mortgages in the United States, requires a minimum credit score of 620 for conventional loans. However, many lender banks may require even higher scores and stricter credit requirements. Therefore, it’s important to maintain a good credit score in order to qualify for a conventional loan and secure favorable terms.
Discover the Basic Principles of a Conventional Mortgage
A conventional mortgage is a loan that isn't backed by any government agency, such as the Veterans Affairs (VA). With conventional mortgages, income requirements set by Fannie Mae and Freddie Mac and loan limits set by the Federal Housing Finance Administration apply. Your credit score and financial status determine whether you're eligible for a conventional loan, with your rate depending on these factors.
One advantage of obtaining a conventional loan is that you may be able to secure a lower rate than other types of mortgage loans. However, it's crucial to understand conventional loan requirements before applying. Some popular lenders offering competitive rates include American Funding, Rocket Mortgage, Wells Fargo, Veterans United, Bethpage Federal Credit Union, Guaranteed Rate, State Employees Credit Union, and Golden 1 Credit Union.
If you're looking for a home purchase or refinance option that suits your budget and financial goals, consider getting a conventional loan. It's essential to work with a trusted lender that will help you explore all available options based on your unique situation. By understanding the basic principles of this type of mortgage loan and doing your research about potential lenders like American Funding or Rocket Mortgage, you can make an informed decision about what works best for you.
Frequently Asked Questions
What is the difference between a government-backed and a conventional loan?
Government-backed loans are guaranteed by the government, have lower down payment requirements, and may have more flexible credit score requirements. Conventional loans are not guaranteed by the government, typically require a higher down payment, and often have stricter credit score requirements.
What is a conventional mortgage loan?
A conventional mortgage loan is a type of home loan that is not government-backed, meaning it is not insured or guaranteed by the government. These loans typically require a higher credit score and larger down payment than government-backed loans, but may offer lower interest rates and more flexibility in terms.
What is the difference between conventional and conforming loans?
Conventional loans refer to any mortgage that is not backed by a government entity. Conforming loans are a specific type of conventional loan that meet certain guidelines set by Fannie Mae and Freddie Mac.
Where can I get a conventional loan?
You can get a conventional loan from a variety of lenders such as banks, credit unions or online lenders. It's important to compare rates and terms from different lenders to find the best deal for your financial situation.
