Conventional Home Mortgage FAQ
A conventional home mortgage is a loan that is not insured or guaranteed by the federal government. This type of mortgage has become increasingly popular in recent years, as more and more people are looking to buy homes without having to go through the complex process of getting an FHA loan. In this blog post, we will answer some of the most common questions about conventional home mortgages. We will discuss whether or not a conventional loan is better than an FHA loan, the pros and cons of taking out a conventional mortgage, and other FAQs about this type of loan.
What Is a Conventional Home Mortgage?
As alluded to in the opening paragraph, conventional home mortgages are those that are not backed by a federal entity (sometimes referred to as an FHA loan). This type of home mortgage is generally offered through private lenders—whether they be credit unions, banks, or mortgage businesses. While a conventional home loan is funded by a private lender, some are eligible to be “guaranteed” by government-sponsored endeavors like Fannie Mae and Freddie Mac.
What Are Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are the somewhat affectionate nicknames for two federal enterprises: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The function behind these two large companies is to reduce the risk for both investors and lenders in the housing market in an effort to make loans more affordable. Typically, loans not guarantee by Fannie Mae and Freddie Mac will be more expensive.
Do You Have to Live in a Home With a Conventional Loan?
At least for the first year after you’ve bought it, the answer to this question is yes. After you have lived in a home procured by a conventional loan for one year, you are then generally able to rent it out to tenants. However, it is always best to check with your lender before you set out to rent your home to verify that they haven’t placed any restrictions on the use of the property.
Is a Conventional Home Loan Better Than an FHA Loan?
If you are looking for a loan that is relatively easy to qualify for, you may be interested in a conventional home loan—though there are some benefits to federal loans as well. Federal mortgage loans tend to have lower credit score requirements, allow higher debt-to-income ratios for prospective homeowners, and are open to refinancing in the future.
With the leniency of federal FHA loans comes some downsides as well: these types of mortgages often have strict property requirements and inspections, requirements for more money upfront in a down payment, mandatory mortgage insurance, and the purchaser must use the house as their primary residence—not rent it out.
So, to answer the question, the type of loan that is best for your circumstances really depends on your credit score, your ability to make a high down payment, your primary motivation for buying the house, and your ability to include mortgage insurance in the cost of purchasing your home.
What Are the Benefits of a Conventional Home Mortgage?
Now, let’s talk about what’s good about conventional home mortgages so you can decide if they are the best path for financing your home. Here are some of the top benefits of going with a conventional loan for your mortgage plan:
- You can do what you want with the house, after one year has elapsed: This means that you can potentially flip the house or rent it to tenants after you pass the one year mark—unlike with an FHA loan!
- Generally lower down payments: While FHA loans tend to require as much as 3.5% or more as a down payment, conventional mortgage loans generally hover around 3% down. Typically, the size of your down payment will depend on your credit score, so it’s generally a good idea to do as much as you can to boost your credit score before buying a house.
- You are more likely to be approved: Unlike the strict inspection policies associated with a federal loan, you may be able to purchase that fixer upper you’ve had your eye on without worrying about qualifying for help financing it. This eliminates a huge hurdle presented by FHA loans and offers much more freedom on which kinds of homes you may be able to finance.
What Are the Downsides of a Conventional Home Mortgage?
While there are several key benefits to conventional home mortgages, there are some downsides as well. Conventional home mortgages may be easier to get than federal FHA loans, but they also have:
- Insurance requirements: If you are hoping to make a down payment of less than 20%, which is quite a pretty penny depending on the home you have your eyes on, you may be required to pay for private mortgage insurance to cover the loan—at least, until your equity reaches 78% or more. After that point, you may cancel your insurance coverage; FHA loans on the other hand require mortgage insurance over the whole lifespan of the loan.
- Significant credit score requirements: This is a tough one for folks that do not have good credit scores. While conventional home mortgages do not ask for as high of a down payment as FHA loans, they do require a credit score of at least 620 in order to qualify.
Who Is Eligible for a Conventional Home Mortgage?
You’re in a good spot if you can put 3% down on a house, have a credit score of 620 or above, and are ready to pay for Private Mortgage Insurance (PMI) should you be putting less down than 20%–but there are several other factors that go into eligibility for conventional home mortgages, too.
One big influencing factor is the size of your loan, which is subject to annual fluctuations determined by Fannie Mae and Freddie Mac. For example, the loan limit in 2022 for a one-family home is $647,200. However, there are exceptions in areas where there is a higher cost of living associated with the local market. Examples of this are Alaska and Hawaii, which may have loan limits closer to $1 million.
Another factor that affects a prospective homeowner’s eligibility for a conventional home mortgage is their Debt-To-Income ratio (DTI). This percentage weighs the amount of money you make every month with how much of that income must be dedicated to paying off debts, like car payments, student loans, or credit card payments. The majority of conventional home mortgages require a DTI of 50% or less.
Better Lending Through Gain Mortgage Group
Buying a house marks an exciting chapter of life—whether you are planning on purchasing a legacy home or looking to flip or rent a home for revenue. When it comes to selecting the right mortgage loan for your circumstances, it’s best to take a holistic look at credit score, income and debt ratios, down payment, insurance needs, and even your intentions for the house. Once you have determined which loan is best for you, you can begin the work of finding the right lender to trust with this significant investment.
Are you looking for a lender to fund your conventional home mortgage? Contact Gain Mortgage Group today!