Conventional Loan
What is a Conventional loan?
A conventional loan is a type of mortgage loan that is supported and sponsored by government enterprises to distribute loan funds to consumers. These loans are backed by private lenders, and their terms and conditions are set by the lender. Conventional loans typically require a higher credit score and a larger down payment compared to government-backed loans, but they can have more flexible terms and might not carry certain types of insurance premiums.
At Brighton Bank, we recognize that the path to homeownership can often seem intricate and overwhelming. With this understanding, we've crafted our Conventional Loan landing page to be more than just a digital touchpoint. It's not merely about presenting loan options; it's about equipping you, our valued customer, with a comprehensive understanding of what a Conventional loan entails. Through interactive tools, easy-to-grasp information, and on-demand assistance, Brighton's Conventional Loan landing page serves as a guiding light for all aspiring homeowners, ensuring clarity, confidence, and a closer step to the home of your dreams.
Benefits of Choosing a Conventional Loan
Choosing a conventional loan comes with several benefits for borrowers, including:
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No Private Mortgage Insurance (PMI) with 20% Down: If you can put down 20% or more of the home's purchase price, you won't have to pay PMI, which can save you money over the life of the loan.
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Flexibility in Loan Terms: Conventional loans come in a variety of terms, typically ranging from 10 to 30 years, allowing you to choose a term that best fits your financial situation.
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Higher Loan Limits: In many areas, conventional loans often have higher loan limits than government-backed loans, which can be beneficial if you're looking to buy a more expensive property.
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Available for Various Property Types: Conventional loans can be used for primary residences, second homes, and investment properties.
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Rate Choices: Borrowers can choose between fixed-rate and adjustable-rate mortgage (ARM) options.
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Potential for Lower Interest Rates: Borrowers with excellent credit scores might secure lower interest rates with conventional loans compared to some government-backed loans.
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No Upfront Funding Fee: Unlike some government-backed loans that have an upfront fee, conventional loans typically don't require one.
Loan Type
Fixed-rate Mortgages (FRM)
Fixed-rate mortgages ensure that the interest rate remains unchanged throughout the entire term of the loan. This consistency offers a stable monthly principal and interest payment for borrowers.
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Stability: One of the biggest advantages of an FRM is that your monthly payments are predictable and won't fluctuate based on market conditions.
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Interest Rates: Although they might start with a slightly higher interest rate than adjustable-rate mortgages, they offer the comfort of knowing your rate won't increase in the future.
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Long-term Planning: With stable monthly payments, budgeting and planning for future financial commitments become more straightforward.
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Protection Against Market Volatility: If market interest rates rise, you won't be affected, ensuring that your loan remains affordable.
Adjustable-rate Mortgages (ARM)
Adjustable-rate mortgages have interest rates that can fluctuate over time. These rates are typically linked to a specific financial index and can vary based on market conditions.
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Initial Savings: ARMs usually come with a lower initial interest rate compared to fixed-rate mortgages, leading to lower initial monthly payments.
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Rate Adjustments: The interest rate on an ARM will adjust periodically after the initial fixed-rate period ends. The frequency of these adjustments can vary based on the specific terms of the loan.
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Potential for Rate Caps: Many ARMs come with a cap on how much the interest rate can increase during a given period and over the life of the loan, offering some protection against drastic rate hikes.
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Benefit in Falling Rate Environments: If market interest rates decrease, you might benefit from lower interest rates and monthly payments.
Conforming Loans
Conforming loans adhere to the guidelines and loan limits set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and sell most U.S. mortgages. The primary characteristics and details of conforming loans include:
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Loan Limits: Every year, Fannie Mae and Freddie Mac establish limits on the size of loans they will purchase, based on the October-to-October changes in mean home prices. For most counties in the U.S., the 2022 loan limit was set at $726,200 for a single-family home and it is anticipated to increase to $750,000 in 2024.​
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Credit Score and Down Payment: Typically, conforming loans require a higher credit score and a minimum down payment, which can range from 3.5% to 20% or more.
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Mortgage Insurance: If the down payment is less than 20%, borrowers might be required to pay private mortgage insurance (PMI) until they reach at least 20% equity in the home.
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Interest Rates: Due to the standardized nature and lower risk associated with these loans, they often come with lower interest rates compared to non-conforming loans.
Non-Conforming Loans
Non-conforming loans are mortgages that don't meet the criteria set by Fannie Mae and Freddie Mac. They have their own unique set of characteristics:
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Jumbo Loans: The most common type of non-conforming loan is a jumbo loan, which is a mortgage that exceeds the conforming loan limits. Because they can't be sold to Fannie Mae or Freddie Mac, they are often kept on a lender's own books or sold to other investors.
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Flexible Criteria: Depending on the lender, non-conforming loans might have more relaxed credit score requirements or other criteria, making them appealing to certain borrowers.
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Higher Interest Rates: Due to the increased risk associated with larger loan amounts and the inability to sell these loans to government-sponsored entities, lenders often charge higher interest rates for non-conforming loans.
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Varied Loan Structures: Some non-conforming loans might offer unique loan structures or terms, providing flexibility to borrowers with specific needs.
Conventional Loan Requirements
Conventional loan requirements can vary by lender, but the following are some common criteria that borrowers typically need to meet:
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Credit Score: A minimum credit score is often required, with many lenders preferring a score of 620 or higher. Borrowers with higher scores might receive more favorable interest rates.
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Down Payment: While it's possible to secure a conventional loan with as little as 3.5% down, a down payment of 20% or more will avoid Private Mortgage Insurance (PMI).
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Debt-to-Income Ratio (DTI): Lenders usually look for a DTI ratio – which is your monthly debt obligations divided by your gross monthly income – of 43% or lower, though some might allow higher ratios with compensating factors.
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Employment History: Steady employment, typically two years or more with the same employer or in the same line of work, is preferred.
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Proof of Income: Borrowers need to provide W-2 statements, recent pay stubs, or tax returns to prove consistent income.
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Assets: Lenders might require documentation of assets like bank statements, retirement accounts, or other real estate or valuable possessions.
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Property: The property being purchased typically needs to be appraised by an approved appraiser to ensure its value matches the loan amount.
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Loan Limits: Conventional loans have maximum lending limits, which can vary depending on the country in which you're buying. These limits are set by the Federal Housing Finance Agency (FHFA) and can change annually.
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Property Use: The property being purchased should generally be used as a primary residence. However, conventional loans can also be used for second homes or investment properties.
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Private Mortgage Insurance (PMI): If your down payment is less than 20% of the home's purchase price, you'll typically be required to pay PMI. The exact amount can vary based on the loan-to-value ratio and other factors.
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Good Financial Standing: Lenders might scrutinize any recent bankruptcies, foreclosures, or delinquencies. Typically, a certain number of years must have passed since these financial events.
Application Process
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Research & Pre-Qualification
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Begin by understanding the different types of loans available.
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Approach a lender or use an online tool to pre-qualify and determine your budget.
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Gather Necessary Documents
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Proof of income: Recent pay stubs, tax returns, W-2 or 1099 forms.
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Proof of assets: Bank statements, retirement accounts, other real estate or valuable possessions.
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Credit history: The lender usually does this, but it's good to know your credit score beforehand.
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Personal ID: Driver’s license, passport, or any other government-issued ID.
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Choose Your Loan Type
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Decide between options like fixed-rate, adjustable-rate, conforming, or non-conforming based on your needs and qualifications.
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Submit Application
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Complete the lender's application form. Nowadays, many lenders also offer online applications for convenience.
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Pay any application fees if required.
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Home Inspection & Appraisal
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Once approved, your lender will require an appraisal to ensure the property is worth the amount you’re borrowing.
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Consider getting a home inspection to identify potential issues with the property.
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Review Loan Estimate
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After applying, the lender provides a loan estimate, which outlines the loan terms, interest rate, and estimated monthly payments. Review this document carefully.
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Finalize and Close
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If all looks good and you agree to the terms, sign the necessary paperwork.
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Pay the down payment and closing costs.
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Once everything is processed, you'll receive a notice of when your first payment is due.
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Terms Explained
Conventional Loan: A mortgage loan not insured by a government agency, such as FHA or VA. It's often obtained from a bank or direct lender and requires the borrower to meet specific credit and financial criteria.
Private Mortgage Insurance (PMI): Insurance that a borrower might be required to pay if the down payment is less than 20%. PMI protects the lender in case the borrower defaults on the loan.
Fixed-rate Mortgage (FRM): A mortgage with an interest rate that remains the same for the entirety of the loan term.
Adjustable-rate Mortgage (ARM): A mortgage with an interest rate that can change periodically based on changes in a corresponding financial index.
Conforming Loans: Mortgage loans that adhere to the guidelines set by Fannie Mae and Freddie Mac, including specific loan limits.
Non-Conforming Loans: Mortgage loans that do not meet the guidelines set by Fannie Mae and Freddie Mac. The most common type is a jumbo loan.
Jumbo Loan: A type of mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac.
Federal Housing Finance Agency (FHFA): A U.S. government agency that oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. They set annual limits for conforming loans.
Debt-to-Income Ratio (DTI): A percentage that represents a borrower's monthly debt payments divided by their gross monthly income. Lenders use it to assess a borrower's ability to manage monthly payments and repay loans.
Loan-to-Value Ratio: The ratio between the loan amount and the appraised value of the property. For instance, if a borrower takes a $90,000 loan for a $100,000 home, the LTV is 90%.
Appraisal: A professional assessment of a property's market value, typically required by lenders before loan approval to ensure the property is worth the amount being loaned.
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Rate Cap: For ARMs, a limit on how much the interest rate can change, either annually or over the life of the loan.
Loan Estimate: A document provided by the lender after applying for a loan. It details the loan terms, interest rates, estimated monthly payments, and other related costs.
Credit Score: A numerical representation of a borrower's creditworthiness, determined by credit history. Lenders use it to evaluate the potential risk posed by lending money to consumers.
Down Payment: An initial upfront portion of the total amount due, made at the time of purchase. It's usually expressed as a percentage of the property's total value.
Closing Costs: Fees and expenses, beyond the property cost, that homebuyers and sellers incur to complete a real estate transaction. These can include title searches, lawyer fees, and home inspections.
Disclaimer: The loan scenario is based on a 10-year fixed, property purchase price of $300,000, with a down payment of 5%. The interest rate for this loan would be 6.99%, with an Annual Percentage Rate, or APR, of 7.280%. Your estimated monthly payment for this loan would be $3,308/mo. All loans are subject to credit approval. Payment does not include taxes and insurance; your payment can possibly be higher.
2nd Loan Scenario - The loan scenario is based on a 30-year fixed, property purchase price of $300,000, with a down payment of 20% . The interest rate for this loan would be 7.490%, with an Annual Percentage Rate, or APR, of 7.837%. Your estimated monthly payment for this loan would be $1,991/mo. All loans are subject to credit approval, Payment does not include taxes and insurance; your payment can possibly be higher, additional terms and conditions may apply.