By Rob Greenbaum, Vice President of Sales with AAFMAA Mortgage Services LLC
When you’re shopping for a mortgage, you’re likely to hear the term conventional loan. In 2018, conventional loans made up more than 74% of all home loans issued in the U.S. and it’s easy to see why they are such a popular choice with borrowers, lenders, and investors.
What is a Conventional Loan?
Several agencies of the federal government sponsor well-known mortgage loan programs, including the Federal Housing Administration (FHA), the US Department of Agriculture (USDA) and the US Department of Veterans Affairs (VA). These agency programs offer loans with various qualification criteria and affordability features, and the agencies agree to step in and make investors whole if a borrower is unable to repay their mortgage obligation. Private mortgage lenders, on the other hand, back conventional loans and borrowers usually pay for any mortgage insurance required to protect against their own default risk. However, without the involvement of the government, applying for a conventional loan is simple and closing is usually quick and easy.
A conventional loan is “conforming” if it meets the maximum loan amount and certain underwriting guidelines set by the federal government. Fannie Mae and Freddie Mac, the government-sponsored enterprises and largest purchasers of mortgage loans in the U.S., set other rules for conforming loans. Because of this guidance, investors understand the risk factors for these loans very well and actively seek opportunities to invest in them.
Every lender has slightly different terms and eligibility standards for their conventional loan programs. Ideally, you should meet with several lenders to find the best fit for you. Doing so may help you get the right loan for your needs and situation, plus get a lower interest rate and lower closing costs. This may save you thousands of dollars over the short- and long-term.
Advantages of Conventional Loans
If your credit score is over 680, and you have a debt-to-income (DTI) ratio of 43% or less, conforming conventional loans can offer great rates, lower costs, and can be used to buy all kinds of property types from single-family (detached) homes to second homes, investment properties, and multi-unit properties.
Conventional loans offer buyers the following:
With a conforming conventional loan, borrowers can put as little as 3% down, making conventional financing a strong competitor to FHA, which requires you to put 3.5% down. It’s worth noting that USDA and VA Loans offer zero money down options for those who qualify.
Borrowers can use a monetary gift from a relative or eligible grant from a non-profit agency to pay for your entire down payment and loan closing costs.
- Cancellable Private Mortgage Insurance (PMI)
Lenders require you to pay for PMI if your down payment is less than 20% of the purchase price. But for borrowers with good credit, PMI on conventional loans might cost less than FHA mortgage insurance. This is because PMI is risk-based insurance, meaning that the better your credit history, the lower your premium. Plus, over time when you pay down the principal balance of your mortgage, combined with increases in your home’s value, you may be able to get the PMI canceled – if you mortgage reaches ≤ 80% of the home value.
Loan limits for conventional mortgages are set by the Federal Housing Finance Agency (FHFA). For 2019, the conventional loan limit set for one-unit properties in many US counties is $484,350. However, there are designated high-cost areas where loan limits are higher. For example, a single-family home in Los Angeles County could have a maximum loan of $726,525. Increased loan amounts are also available for 2-, 3-, and 4-unit homes. For multi-unit homes located in high-cost areas, loan limits are even higher.
We’re Here to Help
If you’re a servicemember or Veteran, there are several types of loans for you to consider, each offering certain advantages and disadvantages. For example, VA Loans are only available for current and former members of the military, but they typically offer lower interest rates than conventional mortgages, allow for higher DTI ratios and lower credit scores, and don't require PMI.
It’s not always easy to compare loan products or determine how they’ll fit your current and future needs. That’s why you should work with AMS. You’ll get an honest and fair assessment of your mortgage options from industry professionals who understand military life and have years of experience handling many different mortgage products.
Our mission is to ensure you obtain a low-cost and low-rate mortgage to build, buy or refinance your home. We want to make sure you get the right mortgage to meet your needs. Get a free mortgage assessment today! There’s no cost or obligation. One of our Military Mortgage Advisors will be ready to assist you – so contact us today.