Should You Still Go with a Conventional Mortgage?

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Category:Loans
Posted on: 06/11/2020
Should You Still Go with a Conventional Mortgage?

If you’re looking at purchasing a home and have a good credit score, along with the ability to make a larger down payment, a conventional mortgage may be the route to take.

What’s A Conventional Mortgage?

A conventional mortgage is a type of home loan not backed by a government agency, instead backed by a private mortgage lender. These types of home loans will require a higher credit score and typically a larger down payment, making them more difficult for some people to qualify.

Other home loans like FHA or VA loans are guaranteed by the federal government and make homeownership more attainable and affordable for middle to low-income individuals or families.

Your conventional loan will fall into one of two categories: conforming or non-conforming. Conforming loans will follow guidelines set forth by Fannie Mae and Freddie Mac. This includes a limit on the loan amount.

If you need to borrow more than that limit, a non-conforming loan will fit your needs. Conventional mortgages offer more flexibility for the home buyer, but they’re also a risk because they aren’t insured by the federal government.

Benefits Of A Conventional Mortgage

One of the major benefits of a conventional mortgage is that depending on your down payment, you can avoid paying for private mortgage insurance. Your downpayment can be as low as 3% but there are benefits to higher payments. With a 20% down payment, the requirement of private mortgage insurance may be waived.

Your upfront costs might be higher with a conventional mortgage, not having to pay the private mortgage insurance can be a significant savings if you’re able to make that larger down payment.

With an FHA loan, you’re required to put down a 3.5% down payment and as part of your monthly mortgage payment, you’ll have to purchase and pay a mortgage insurance premium.

There are far fewer hoops to jump through with conventional mortgages than with an FHA loan when it comes to inspections and processing. With an FHA loan, the property you intend to purchase has to meet minimum property standards before you can qualify. These standards could see you having to pay for repairs on the property before it can qualify for a mortgage. The seller could also be responsible for the repairs. Buyers and sellers can negotiate who pays for the repairs.

Conventional loans don’t have a lot of that red tape you find with FHA loans and avoiding that can be appealing for the borrower.

Factors When Considering A Conventional Mortgage

When you’re looking into a conventional mortgage, there are a few factors you’ll want to take into consideration.

FICO Score

Conventional mortgages are going to require that your credit score be higher in order to qualify. You’ll be required to have a credit score of 620 or higher, while FHA loans require a credit score of at least 500.

If your score is high enough, you’ll be able to be considered for a conventional mortgage. 

Down payment

Another serious factor when considering a conventional mortgage is the down payment and your ability to make one. Typically, a down payment for this type of mortgage is between five and 20%, but there are some available that’ll allow for a down payment as low as 3%.

There are benefits to paying a higher down payment percentage. As mentioned above, if you can pay 20%, you can avoid paying for private mortgage insurance.

Before applying for a conventional loan, determine if you’re financially able to afford the necessary down payment.

Interest Rates

If you have a lower credit score, the interest rates are higher and other fees are often included in the loan terms. The interest rates for conventional loans are typically higher than on FHA loans. With a conventional loan, you might be offered the option of fixed or adjustable interest rates. Fixed rates will be determined for a set number of years meaning you’ll know what your monthly payment is for that time. For adjustable interest rates, your monthly payment will fluctuate along with your monthly payment.

Do some research before you make a decision. Research your options, but also check your credit score and look at how much you can afford. Learn about all of your options before making a selection and speak with mortgage lenders to have a full picture of what is available.

Conventional mortgages might just be right for you if you have a good credit score and can afford to put down a larger down payment. With less red tape, higher loan limits, and the possibility of not having to purchase private mortgage insurance, conventional loans are a popular way to pay for a new home.

Finance Guru

Finance Guru