“Conventional loans” are mortgages that are not guaranteed or insured by a government agency. In other words, the investor is assuming all the risk. Because of this, rates have trended a little higher than government insured loans like FHA or USDA loans. Additionally, the down payment required for a conventional loan has historically been a little higher at around 5%; however, there are some 3% down options available. In 2016, new conventional programs were introduced with a lower down payment to take back some the market share from FHA which only requires a minimum of 3.5% down. There are specific guidelines for these new programs and I can check if you’re qualified for a lower down payment loan option if you are interested.
Something important to remember when you are applying for a mortgage is that the down payment represents your actual initial ownership in the home. It represents your “skin in the game” should anything happen and you default on your loan. So if you put down 5%, the bank really owns 95% of your home when you close. Looking at it from this perspective you can better understand the bank’s risk if you are unable to make your mortgage payments for any reason. To mitigate this risk, the bank is going to require you to carry Mortgage Insurance for anything greater than an 80% loan to value (LTV). If you do not want mortgage insurance, then you have to be able to put down at least 20% of the sales price as a down payment. The good news with a conventional loan is that the mortgage insurance can go away once you reach the 80% LTV; however, on an FHA loan, the mortgage insurance is typically applied for the life of the loan.
Mortgages are investment vehicles for investors such as banks and other investors. Consequently, the institutions in the mortgage business want to be sure they can sell your mortgage as an investment at a later date. The majority of loans are sold in a bundle to another investor before you even make your first payment. Although this is not always the case, by thinking of your mortgage as an investment vehicle may help you understand lending guidelines. Conventional loans fall under “conforming” loan guidelines which typically include a lower Debt to Income (DTI) ratio threshold than some government loans. There are many other guidelines for conventional loans, but DTI tends to be the first major factor in determining if you qualify for a conventional mortgage. The second being your down payment, and the third your credit score. This is an oversimplification and not necessarily definitive, but these three factors are indeed fairly constant in determining how safe of an investment you are when compared to conforming lending guidelines. When you are being “pre-qualified” your loan officer is essentially determining what kind of loan you qualify for.
FHA and other government backed loans are insured by the federal government. As such, they require both an up front mortgage insurance premium based upon a percentage of the loan as well as monthly mortgage insurance for the life of the loan. This additional insurance allows them to offer a slightly lower rate because their overall risk is offset to some degree by the mandatory mortgage insurance.
Absolutely. If you have good credit, a qualifying debt to income ratio, and you have the requisite down payment, then a conventional loan is definitely available to you.
This depends upon where in the 600’s you are. Many lenders have a credit overlay which dictates the lowest credit score you can have and still qualify for a conventional loan. Keep in mind that the lower your credit score, the higher the interest rate you will get because there is a direct correlation between your credit score and perceived lending risk; i.e., the higher your score, the more likely you are to make your payments. There is a point of diminishing return on the interest rate the lower your credit score is at which point you may be better off with an FHA loan. You will also have higher mortgage insurance with a lower credit score on a conventional loan. A good loan officer will look at all your options and help you determine how to make your money work best for you.
No, your initial mortgage insurance premium decreases as your LTV decreases since you become less risky having more “skin in the game” with a larger down payment.
You are definitely a good borrower and it’s truly fantastic that you have made all your payments on time. I actually have a new program where you may qualify for a conventional loan up to 49% DTI if the automatic underwriting system provides an approval by Fannie Mae. If it does not, you are simply over current conforming conventional lending guidelines and I’m afraid you won’t be approved without reducing debt or increasing your income. Give me a call and we’ll see if you can qualify for the new program.
An investor will lend based upon the sales price or the appraised value, whichever is lower. If you get a great deal on a house and the appraisal comes in higher than your sales price, then congratulations on your instant equity! 🙂 You can draw on this equity later with a cash-out refi, or you may be able to do a rate/term refi later to eliminate your mortgage insurance earlier. If the appraisal comes in lower than the sales price, the lender will only lend based upon that appraised value, so you and the agents will need to work that out. Either the seller lowers the sales price based upon the appraisal, you make up the difference between the sales price and the appraised value in cash at closing, or you meet the seller somewhere in the middle.
Why Choose Me As Your Conventional Mortgage Loan Officer?
We can close your loan in less than 30 days
We don’t have points or fees so we keep your closing costs as low as possible
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