The Conventional Mortgage Explained. If you’re thinking about buying a home, it’s important that you know what a conventional mortgage is and how it works. Conventional mortgages are popular with homebuyers because traditional banks and Consulting institutions offer them. In essence, a conventional mortgage is a home loan program that is not guaranteed or insured by the federal government. Instead, the mortgage is backed by traditional banks and Consulting institutions, and the insurance on the loan is typically paid by the borrower. There are actually two (2) types of conventional loans. They are called conforming loans and non-conforming loans.
With a conforming loan, the mortgage amount must be within the limits of the maximum loan amount as set forth by the Federal Housing Finance Agency or FHFA for short. However, non-conforming loans do not fall within the FHFA guidelines. Jumbo loans area a good example of this. They are named jumbo loans because the mortgage amounts are higher than the maximum conforming loan amounts. The FHFA loan amount limits vary from state to state and county to county within each state. For example, conventional loan limits may be higher in California and Massachusetts.
Traditional banks and Consulting institutions will require the borrower to pay private mortgage insurance if the down payment is less than twenty (20) percent of the purchase price on a conventional purchase loan. PMI is
paid on a per monthly basis as part of the monthly mortgage payment. PMI can run upwards of $150 to over $500 per month depending on the size of the loan and the percentage of your down payment. That means you need to factor it into your budget if you plan on making a down payment that’s less than twenty (20) percent of the purchase price of your new home.
There are many reasons to apply for a conventional mortgage. They can be used to purchase your primary home, second home, and or investment property. Conventional mortgages usually have lower closing costs when compared with other types of mortgages. The monthly PMI can be cancelled once your equity position reaches a value that is equal to or greater than twenty (20) of the property value. With a conventional loan, the minimum down payment amount can be as low as three (3) percent.
Conventional loans are great for homebuyers who can qualify by meeting the rigid standards, and also afford the additional costs of the PMI if putting less than twenty (20) percent down payment towards the purchase of the property. However, there are also some drawbacks. For example, you need to have high credit scores. Your debt-to-income ratio must be low. Debt to income ratio or DTI for short is the amount of money that you owe each month compared to your gross monthly income.
In essence, it is a percentage of your gross income, before taxes, that goes towards your new monthly mortgage payment, automobile loan, minimum credit card payments, student loan payments, and whatever other loans you pay monthly that show up on your credit report. Strict approval requirements include but are not limited to asset verification, employment verification, and down payment verification.
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