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Assurance Financial Blog

Everything You Need to Know About Conventional Loans

The most common type of home loan is the conventional loan. These types of loans are perfect for borrowers with are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance, while also giving borrowers the option of fixed or adjustable rates.

When & How is this Loan Helpful?

When you apply for a home loan, you have several different options to choose from, but the most common are Conventional loans or government insured loans. Conventional loans follow the guidelines of Fannie Mae (the Federal National Mortgage Association or FNMA) or Freddie Mac (The Federal Home Loan Mortgage Corporation, or FHLMC). Conventional loans, unlike government-insured loans, are insured through private companies. The reason most Conventional mortgages are attractive to most borrowers is that they often feature better terms than jumbo or government insured loans. Conventional loans are appealing because they are available in both fixed or adjustable rate options. A “fixed-rate” mortgage refers to an interest rate that won’t change during the life of your loan.

Because of these options, a conventional loan is an excellent choice for people who plan on living in their home for many years and want to know what their monthly payments will be for the duration of their loan. The other side of the coin is adjustable-rate mortgages (ARMs). ARMs offer a lower interest rate for a short term during the first few years of the term—usually from 3 to 10 years, after which the interest rate can change.  If you intend to own your home for a brief period, you could save money with an ARM at today’s low rates. If you plan to stay in your home longer, a fixed rate may be your best option.

A convention loan is a mortgage that isn’t received from a government agency. It is the most common type of loan, requiring acceptable credit and a reasonable down payment. Most borrowers find this loan attractive because of its two different rate options and its low-interest rates compared to other government loans such as those given out by the Federal Housing Association and the Department of Veterans Affairs. As a long-term option for most homebuyers, Conventional loans offer fixed and adjustable rate options. Depending on your situation, one may work better than the other. However, a significant draw for most is the option to choose their rate in general.

Four Things to Know About:

  • Your debt-to-income ratio – Debt-to-income ratio (DTI) is a proportion that compares your monthly income with your monthly payments on various debts like car loans, student loans, or credit cards. Having a low ratio is attractive to lenders. However, you may be approved with a high DTI if your credit history is excellent and you have sufficient reserves in the bank after closing.
  • Your credit history – When it comes to credit score, obviously, the higher, the better. In general, a borrower will need a minimum credit score of 660 to be eligible for a conventional loan. This score is considered acceptable, with anything over 700 being considered excellent.
  • Reserves after closing – The most important part of getting approved for a loan is ensuring the lenders you can pay it back. Lenders want to know that, should you be laid off, you will still have money to draw from to make your monthly payments. If you can prove you can do this, you will become more attractive to lenders.
  • Fannie Mae and Freddie Mac – These are both federal associations that set guidelines for how loans are financed based on the home and homeowner. Fannie and Freddie have relatively lenient requirements when it comes to traditional single-family homes, but some “unique” property types – “tiny” homes, mobile homes, or homes with unique design/structure – may be harder to finance with a conventional loan.

If you’re interested in getting a conventional loan, contact one of our loan agents today. We will make sure you have everything you need to make the process as seamless as possible!

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