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A Quick Overview of Conventional Loans

With interest rates changing almost daily, I asked Connor Beckman from Academy Mortgage to write this week’s blog to help us understand a little bit more about some of the different types of mortgages that might be available for our clients.

You have plenty of decisions to make when buying a home—from where you’d like to live to what color you want to paint the walls. Another important question is what type of home loan you’ll borrow with, whether it’s Conventional, FHA, USDA, or VA, among others.

A Conventional Loan is worth getting to know since it’s a common and popular mortgage used by today’s homebuyers.

What is a Conventional Loan?

Conventional Purchase Loans are broken down into two categories:

  • Conforming
  • Non-Conforming

Conforming and Conventional Loans are often used interchangeably, though they’re not exactly the same. You can read about the subtle differences here. A Conforming Mortgage conforms to Freddie Mac and Fannie Mae guidelines. A Non-Conforming Mortgage does not. The government-backed loans mentioned above—USDA, VA, and FHA—are Non-Conforming.

Freddie Mac and Fannie Mae are GSEs (government-sponsored enterprises) that purchase loans from mortgage lenders to be sold to investors. This creates liquidity so that lenders can continue granting loans to homebuyers.

Conventional Purchase Loans may also come with one of two types of rates:

  • Fixed
  • Adjustable

When an interest rate is fixed, it remains the same for the life of your mortgage. If an interest rate is adjustable, it usually starts out lower for the first few years of a mortgage and then changes at predetermined times, i.e., every six months, after the initial fixed period of the loan ends.

A Conventional Mortgage is distinct from other government-insured loans because it can be used to purchase multiple property types. These include a primary home, a vacation home, or an investment property. The same isn’t true for FHA, VA, and USDA Loans, which are only for purchasing primary residences.

Along with this flexibility, many homebuyers appreciate that Conventional Mortgages are customizable. This is especially true when working with Academy Mortgage. Academy Loan Officers have access to one of the largest product portfolios in the industry, giving them the opportunity to personalize your loan to you.

Is a Conventional Loan right for you?

Here are some of the advantages of a Conventional Mortgage:

  • Low down payment minimum. The minimum down payment for a Conventional Purchase Loan is just 3 percent.
  • Reasonable credit requirements. A minimum FICO score of 620 is required to qualify, which technically falls in the “fair” credit score range. However, a higher credit score may help you qualify for more competitive loan terms.
  • No PMI with a higher down payment. You can avoid paying monthly PMI (Private Mortgage Insurance) if you put down 20 percent or more.
  • High loan limits. Conventional/Conforming limits recently increased to $726,200 for single-unit properties in most areas. Higher limits may allow you to purchase in a high-cost region without having to use a Jumbo Loan, which typically has a larger down payment requirement.

Here are some of the disadvantages of a Conventional Mortgage:

  • Harder to qualify for. Conventional Mortgages can have more stringent qualification requirements than loans backed by the federal government.
  • Higher credit score requirement. The credit score minimum for a Conventional Mortgage is 620. In comparison, an FHA Loan has a 580 FICO score minimum.
  • Private Mortgage Insurance. You’ll be required to pay monthly PMI if you put down less than 20 percent. You can request PMI cancellation once your mortgage’s principal balance falls to 80 percent of your home’s original value.

A 2-1 Buydown may also be available with a Conventional Mortgage. Using a 2-1 Buydown, you could secure a lower, more affordable interest rate for the first two years of your loan. Reducing your rate may help to reduce your monthly mortgage payment—often by several hundred dollars. A 2-1 Buydown typically decreases the rate by 2 percent for the first year and 1 percent for the second. Ask your Academy Loan Officer for details.

Are you ready to take the first step?

If it’s not a Conventional Loan, the odds are good that Academy Mortgage has another loan program that can be customized to fit your life. Academy Mortgage is proud to provide our borrowers with one of the largest loan product portfolios in the industry. This enables you to find the loan that works best for your unique situation. To take the first step: Get in touch with Connor Beckman today!

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