Conventional Loan

HIGHLIGHTS OF A Conventional Loan

• Lower Interest rate options for buyers with good credit
• Flexible mortgage insurance option
• Fewer penalties and fees
• Higher loan limits than some government-backed loan programs
• No PMI required with a 20% down payment
• Adjustable-rate, fixed-rate and jumbo mortgage options
• Second home purchase options
• Flexible loan terms

If you have good credit and stable income, a conventional loan might be the right option for you, since conventional loan programs traditionally offer:

• Lower interest rates for borrowers with good or great credit
• Flexible mortgage insurance options, if applicable (mortgage insurance not always necessary)
• Fewer penalties and fees
• Flexible loan terms
• Down payments range from 3% – 20% or more

There are conventional loan programs that allow for a down payment as little as 3%, so if you qualify for these programs, then yes! In fact, one of the biggest home-buying myths out there is that you need a 20% down payment to buy a home; you absolutely don’t.

Take note, however, that if your down payment is less than 20%, a private mortgage insurance (PMI) payment will be added to your monthly mortgage payment. According to the CFPB (Consumer Finance Protection Bureau) you can request to cancel (PMI) on a conventional loan when your mortgage balance drops to 78% of your home's original value.

It depends on your unique financial situation and goals when buying a home. One loan type is not necessarily “better” than another; it’s really more about what loan type fits your current situation and needs. If you have relatively good credit, stable income and a little bit more saved for a down payment, a conventional mortgage loan might be the right fit for you.

If you are an active U.S. service member, veteran or surviving spouse (where a VA loan might be advantageous); or unless you are specifically looking for a home in a more rural setting (where a USDA loan might be advantageous). But as always, your Ridgeway Team mortgage advisor will be able to go through all this with you and help you decide which type of loan fits your specific situation best.

One of the major motivations for refinancing from an FHA loan into a conventional loan is to drop the requirement of paying monthly mortgage insurance on top of their mortgage payment. If this is your aim, it may be better to wait until you have 20% equity in the home, because if you don’t, a conventional mortgage loan will still require you to pay mortgage insurance until you do have that 20% equity stake.

Another major motivation for refinancing from an FHA loan into a conventional mortgage loan is when someone has improved their credit score or debt situation a great deal during their first years as a homeowner. If your credit score has gone up considerably or if you have paid off some debts recently, you might now qualify for a significantly better mortgage rate on a conventional loan, which could make a conventional loan more advantageous over the life of the mortgage.

Keep in mind, though, that current market mortgage rates also have a great deal to do with what rate you may get on a refinanced mortgage. So, just because your situation has improved does not always mean now is the right time to refinance from one mortgage type to another. Your Ridgeway Team mortgage advisor will be able to help you find out what benefits you may reap from refinancing from an FHA loan to a conventional loan and when might be the best time to do so.

There may be several ways to accomplish this, depending on your financial situation and where you are buying or refinancing your home.

• Ask the seller for what is known as “seller concessions” to help pay some or all of your closing costs. You may be able to negotiate that into your contract to buy the home. Tell your real estate agent and Ridgeway Team mortgage advisor up front if you plan to ask for these seller concessions. Also, please note that due to varying real estate market conditions, these types of negotiations may or may not be feasible (ie – a “seller’s market” versus a "buyer's market").
• You could pay a higher mortgage interest rate in exchange for the lender’s help in covering your closing costs. This is commonly referred to as “buying up” your interest rate.
• Many conventional home loan programs allow buyers to use gift money given by family members, your employer or close friends for your closing costs. Tell your Ridgeway Team mortgage advisor up front if you plan to use gift money to defray closing costs.
• Apply for grants and/or forgivable loans through down-payment assistance programs. These programs tend to be governed at the county or state level and their qualifying rules vary. Ask your Ridgeway Team mortgage advisor if there might be an applicable down-payment assistance program for you.

Owing taxes* is a separate matter from having a tax lien. Tax debt is simply owing money to the IRS and/or a state, but a tax lien means that your taxes went unpaid long enough to trigger collection actions. If you have an IRS lien on your income or assets, it greatly diminishes your chances at getting approved for a conventional mortgage. It does not automatically nullify your eligibility for an FHA loan, but it does nullify eligibility for a conventional mortgage through Fannie Mae.

• For people with better or more established credit profiles and low levels of debt, it may be advantageous to choose a conventional loan over an FHA loan.
• For those who may not have as much established credit, a lower credit score or who may have slightly higher levels of debt, an FHA loan might be the cheaper option over the life of the mortgage loan. This often, but not always, includes first-time homebuyers.