Conventional mortgages are a popular option for borrowers seeking to refinance or purchase a new home. The main distinction for a conventional mortgage is that it is not guaranteed or insured by a government agency, such as the Federal Housing Administration. Instead, these loans adhere to Fannie Mae or Freddie Mac guidelines. These institutions were created by the federal government to buy and sell conventional mortgages and to fund the housing market. As such, all conventional mortgages must adhere to these institutions’ guidelines.
To qualify for a conventional mortgage, borrowers are required to put at least 5% of the loan amount down. For a purchase transaction, this would mean at least 5% of the borrower’s own funds would need to be used as a down payment on the property to be eligible. Likewise, for a refinance the borrower needs at least 5% equity in their home based on appraised value.
In order to avoid paying mortgage insurance on a conventional loan, the loan-to-value (LTV) ratio must be 80% or below. For example, if the borrower’s home is worth $100,000, in order to avoid paying mortgage insurance, the maximum loan amount would be $80,000. If the borrower’s loan-to-value ratio is above 80%, mortgage insurance will be required in either an upfront or monthly fee.
Conventional mortgages are available in 15, 20, or 30 year terms. Shorter loan terms usually result in lower interest rates but larger monthly payments. Longer loan terms result in a more affordable monthly payment. The loans are most commonly associated with a fixed rate; meaning the interest rate remains the same for the entire life of the loan. However, adjustable rate mortgages are also available for conventional loans.
Another positive aspect of conventional loans is the ability to receive cash at closing. If the borrower has more than 20% equity in their home, they have the ability to receive cash out at closing. However, the loan’s LTV ratio cannot exceed 80% LTV ratio. These funds can be used for a variety of purposes and often would have lower interest rates than taking out another type of loan elsewhere. It is an easy way to use home equity.
Conventional mortgages are a great option for borrowers who have the ability to put at least 5% down. They typically have lower interest rates and charges and can be processed quickly.
For any questions about our Conventional Mortgages, feel free to chat with a representative immediately, email us, or give us a call at 877-905-0005.