Conventional loans are a method of acquiring your new home that works by assessing your credit, income and the home itself to provide a response. Using the underwriting guidelines of The Federal National Mortgage Association or Fannie Mae and The Federal Home Loan Mortgage Corporation or Freddie Mac, conventional loans allow you to purchase your home in a standard way without having to save the entire amount in cash prior to purchasing the home.
When a Conventional Loan is the Best Option
Conventional loans are your best option when you are capable of putting forth a small down payment, are willing to wait to make the purchase until the loan is approved and have solid credit and income. Using a conventional loan, you are able to put down as little as three percent of the home’s purchase price. You can also apply for the loan later than most other options, even including waiting to apply until one day after the property is removed from the Multiple Listing Service or MLS after the seller has accepted your offer.
There is a requirement of owner occupancy to make the most of conventional loans. In order to receive the benefit of being able to put down only three percent of the purchase price, you must live in the property after closing and for a time thereafter. The general rule is that you must live in the home for two years, though there are special circumstances that can change this duration.
Your Amount of Acceptable Current Debt
Lending criteria is fairly open with conventional loans, but there are still limits to how much you can borrow. In order to make as certain as possible that you can pay back your mortgage, conventional loans have a required ceiling to your amount of current debt. If your debt to income ratio is over 55 percent, you cannot receive this type of loan. Your debt to income ratio is the amount of your current verifiable income divided by your current required debt payments, and in some cases other expenses such as property taxes on any existing homes you may own will also be taken into account to calculate this figure.
PMI or private mortgage insurance is often required when you take on conventional loans. If your initial loan amount does not provide you with 20 percent or greater equity in your home, you need to have PMI to cover the loan. However, it is sometimes possible for you to ask your lender to either let you buy out the PMI or to have the company pay the PMI on your behalf. While uncommon, this is an option that is worth asking about.
Not Like an FHA Loan
Taking out a conventional home loan is not the same as a loan from the Federal Housing Administration. The criteria for a conventional loan is stricter, and the paper work required is often different. When taking our a conventional loan, you need to be aware of these differences if you are not used to the process.
Types of Property You Can Finance
For most people, taking out a conventional loan is to purchase their personal home. However, in some instances this is not the case. For investment properties, conventional loans are possible. However, the down payment requirement is 10 percent, and often the interest rate is considerably higher with this type of property.
There is a cap on how many properties you can have financed at the same time. At no point may you have more than 10 of this type of loan outstanding, regardless of your level of income or how many properties you may have. For the vast majority of individuals, this is more than sufficient. Naturally, it is important to be aware of how many loans you can take out and keep this number in mind for your future plans.
The LTV or loan to value is a figure that any loan will cap. In the case of conventional loans, you can refinance for debt consolidation or to cash out for whatever reason you consider important. Your total potential LTV or loan to value ratio is the amount of the homes’s assessed value divided by the sum of the loan itself. You may not exceed 85 percent of the home’s value on a cash out or debt consolidation refinance, as the idea is to maintain some level of equity.
Escrow is Not Always Necessary
Escrow is often an important step in the borrowing process. However, with the fairly direct method of conventional loans, often the intervention of an escrow company is not needed. You can ask your lender for details on whether this is possible for you.
Conventional loans are a great way to purchase a home using your good credit.