The Ultimate Guide to a Conventional Home Loan

Conventional Home Loan

Do you dream of buying a home?

You probably think of the luxuries of home buying: the design process, having your friends over, starting your family, and the overall thrill of owning a home. But first-time homeowners dread the mortgage process.

Signing up for a mortgage is one of the necessary aspects of home ownership. Before you picture yourself designing your living room or decorating the backyard for your kids, you have to meet with a lender and discuss your mortgage options.

One of the most popular and recommended mortgage options is a conventional loan. Continue reading and gain a thorough understanding of the conventional home loan.

What is a Conventional Home Loan?

A conventional home loan isn’t insured or issued by the government. The loan is issued by a lender and the homeowner pays the insurance.

These are the most common types of loans and are more popular than government-backed loans.

These loans are so popular, approximately three-quarters of homeowners decide to use a conventional home loan than any other loan type.

Why do homeowners choose a conventional loan? They have a lot more flexibility. You have more flexibility with your down payment. You also have a variety of insurance options and can even opt for cheaper insurance.

But be aware — these loans can get risky, depending on your lender. And not all homeowners qualify for a conventional home loan.

Conventional v. Government-Backed Home Loans

If you’re doing research on mortgage options, you probably see there are benefits when choosing popular government-backed loans such as FHA loans.

These loans are available to homeowners of all income brackets and even homeowners with poor credit scores can qualify.

But there are some important rules when you go with a government-backed loan:

  • A specific down payment is required
  • You have to pay a MIP with your monthly premium

But conventional loans are in your favor. If you can’t pay off your loan, you have the option to pack up and move out. You don’t have this option with government-backed loans.

The Different Types of Conventional Loans

A “conventional home loan” is an umbrella term describing different mortgage loans from private lenders. Your loan options are conforming conventional and non-conforming conventional loans:

Conforming Conventional Loan

These are typically called “Fannie Mae” (Federal National Mortgage Association) or “Freddie Mac” (Federal Home Loan Mortgage Corporation) loans. These are government-backed enterprises that purchase mortgages from lenders.

These loans stand by a specific loan limit. Depending on the area, there’s a maximum mortgage loan amount. This amount can range anywhere between $450,00 to up to almost $700,000.

Nonconforming Conventional Loan

Do you expect your loan to exceed the limit set by Fannie Mae or Freddie Mac? You’ll need a Nonconforming Conventional Loan. These are fully funded by private lenders and not enterprises.

These are harder to get because they require a certain income and credit score.

These are usually saved for high-end properties. These loans come with a lot of risks; this includes paying off the loan and selling the home altogether.

How to Qualify for a Loan

Your first step in the home loan process is sitting down with a lender. They will take a look at several areas of your financial and credit history.

Before you meet with your lender, have these documents ready:

  • Recent pay stubs
  • Tax returns
  • Bank statements

This means you have a steady income, money in the bank, and are honest about your taxes.

Why do lenders look for steady income? They want to see you can afford the mortgage payments and have enough to put a down payment on your house.

Most lenders require at least 3% down, but 10% is recommended. If you can put down 20%, then you don’t need to pay a PMI and you can close your deal faster.

The Benefits of a Conventional Loan

It’s understandable why conventional home loans are popular: they are flexible, you have options with your down payment, the monthly premiums are affordable, and they cater to a wide range of homeowners.

But there are even more benefits. These include:

  • Low-interest rates
  • Fast loan processing
  • Diverse down payment options
  • Various mortgage term lengths (between 10 and 30 years)
  • Reduced mortgage insurance rates

With these benefits, you can create the perfect home loan with the help of your lender. This includes how much you can afford to put down, how much you can afford month-to-month and the length of your loan term.

How to Create an Affordable Home Loan

You’re probably reading this thinking, what’s the best loan I can get for cheap? There are ways you can get your perfect loan for your perfect home while spending as little as possible. Here are some tips:

Down Payment

Keep enough money in the bank for a 10% down payment. Only paying the 3% sounds like a great idea, but you’ll be paying hefty loan payments for years.

This means you’ll likely be paying tens of thousands of dollars up front. But it’s worth it. Your mortgage payments are affordable and your home will already have equity.

If you can, pay more down, such as 20%. This means you skip overpaying the mortgage insurance.

Mortgage Term

The shorter the better. Stick with a 10 or 15-year mortgage.

That does mean your piling you’re mortgage payments up each month. But that house will be paid off quickly and you’ll save on interest. Your interest rates are also fixed so you never have to worry about paying more interest.

What if you decide to sell it? That money goes straight into your pocket and you can buy another house.

Mortgage Payments

Make sure the payments are no more than 25%. This way, you can afford to pay off the house while saving money or raising a family.

Time to Get a Mortgage

If this is your first time buying a house, the mortgage part can be overwhelming. But education is key when deciding which mortgage is best for you. Many homeowners pick a conventional home loan because of the flexibility.

Now that you know your mortgage options, speak to a lender and shop for your dream home.

Do you need to calculate your mortgage payments? Use our calculator.

The Ultimate Guide to a Conventional Home Loan

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