Why Choose Conventional Financing?
Updated: Jul 2, 2020
Whether you’re looking to purchase a new home or refinance the one you have, there are a myriad of decisions to consider: How much you can afford or how much equity is needed. Which neighborhood to settle in or where to seek the right loan. And with all the financing options available, which one is right for you?
The most popular type of mortgage in the U.S. is a conventional loan, with more than 70% of borrowers choosing that avenue. According to BankRate.com, it’s defined as a plain or traditional home loan that’s ideal for borrowers with good credit, and it can carry either a fixed or adjustable rate. A conventional loan isn’t funded or guaranteed by the government as is the case with FHA (Federal Housing Administration) or VA loans (Department of Veterans Affairs).
Although most banks and private lenders follow the same guidelines put in place by Fannie Mae and Freddie Mac, there is additional risk that stipulates more stringent requirements. However, the flexibility and benefits in the long run can make conventional financing very worthwhile.
So, What is Conventional Financing?
First of all, there are several different types of mortgages under the conventional umbrella to consider, depending on your circumstances:
• Purchase – Securing a loan to buy a home.
• Refinance – Replacing your existing mortgage with a new one, usually to procure a lower
interest rate or new term. • Cash-Out Refinance – Refinancing your mortgage while taking cash out of the home’s equity.
• FHA-to-Conventional – A process to refinance an existing FHA mortgage loan into a conventional one, typically for a better rate and elimination of required mortgage insurance.
There are also two categories of conventional financing referred to as conforming and non-conforming loans. Conforming follows the government guidelines around the size of the loan. In most of the U.S., the loan limit is $510,400 for a single-family home in 2020. Non-conforming, or jumbo loans, exceed that limit and may be harder to secure due to the risk.
Who is Eligible for a Conventional Loan?
Unlike government programs, there are some potentially significant credit and income requirements for a conventional loan to consider:
• Down Payment – Although we used to think of a 20% down payment as a must-have for conventional financing, many lenders offer as low as 3% down programs to compete
with the government funded ones. Of course, the more you put down, the lower your monthly payment amount.
• Credit Rating – Lenders also vary here, but a minimum FICO score of 620 is typically required with a score in the 700s recommended to secure a more competitive rate.
• Income and Employment – Conventional financing is an ideal option for those with reliable income and employment. You’ll need to provide payment history to assure lenders you can make your mortgage, and self-employed borrowers will be asked for two years of tax returns.
• DTI, or Debt-to-Income Ration – When balancing your total debt (credit cards, auto payments, etc.) with your income, below 50% is usually what lenders will consider unless there are other factors.
• Cash Reserves – Being able to show cash on hand lets lenders know you can stay on top of the monthly payments in the event of an income interruption. A minimum of two months of reserves is ideal.
If a borrower finds they’re able to meet the eligibility requirements, the benefits – both short- and long-term – can really be worth it. Interest rates have remained low, even in light of this tumultuous year, and qualified conventional borrowers can usually secure a competitive rate. Conventional mortgage lenders like EnTrust Funding (ETF) typically offer flexible term options like 10, 15, 20 and 30 years.
Another big advantage of conventional financing is the reduction or elimination of the PMI (Private Mortgage Insurance) payment that usually comes with an FHA loan. A down payment of 20% can negate the need for PMI, saving thousands over the life of the loan, but there is additional flexibility built in with a lower down. The insurance can be canceled when your principal balance falls to 78% of the property’s value.
Conventional mortgages are also more versatile for different types of properties. Unlike with most government funded loans, you can purchase or refinance secondary homes, investment properties, condos and multi-unit homes.
The conventional mortgage transaction also tends to be much smoother with speedier loan processing due in part to the eligibility requirements.
Should You Get a Conventional Loan? If you’re a discerning homeowner thinking of refinancing your current mortgage, we’re available to discuss the benefits of a conventional loan, as well as other programs that best suit your family’s needs. Call EnTrust Funding (ETF) today to explore your options.