A conventional loan is any mortgage which is not guaranteed or insured by the federal government. Conventional loans were the first traditional mortgage loans made by local lenders. The loans were held in the lender’s investment portfolio until they were either paid in full or foreclosed upon.

 

Although it enabled the borrower to build a business relationship with the lender, this practice was generally not in the lender’s best financial interest. When rates rose, lenders found themselves in the position of receiving below-market interest on their loans, in addition to not being able to recycle the funds to lend to other borrowers.  

 

Conventional loans are “conforming” if they are generally $417,000 or less for a single-family home. Conforming loan limits can be higher in pricier regions of the country. For example, in such states as Alaska and Hawaii, it’s $625,500.

 

There are also established guidelines for borrower credit scores, income requirements and minimum down payments. For example, most conventional loans require somewhere between 5 percent and 20 percent down.

 

Right now those guidelines are changing frequently but they should have at least a 620 credit score. Anything below a 740 credit score and they (lenders) are going to start adding fees which can be quite sizable, in the several-percent range, as borrowers’ credit scores drop compared to loan to value.

 

Conventional loans can be conforming or nonconforming. Loans above the lending limits set by Fannie Mae and Freddie Mac are called nonconforming or jumbo loans.

 

Most conventional mortgages have either fixed or adjustable interest rates. Typical fixed interest rate loans have a term of 15 or 30 years. A shorter-term loan usually results in a lower interest rate. Adjustable-rate mortgages, or ARMs, fluctuate in relation to the rate of a standard financial index, such as the LIBOR. Monthly payments can go up or down accordingly.

 

Cost: Origination fees, down payments, mortgage insurance, points and appraisal fees can mean the borrower has to show up at closing with a sizable sum of money out-of-pocket, or be prepared to roll over some of these costs into their mortgage amount, which may result in a higher loan rate.

 

Pros: Conventional mortgages generally pose fewer bureaucratic hurdles than FHA or VA mortgages, which may take longer to process because of the red tape. And because these mortgages generally require higher down payments than the others, home equity can build up faster.

 

Cons: You’ll need excellent credit to qualify for the best interest rates. Also, many lenders require higher down payments than for government-backed loans. In declining markets such as this one, borrowers may only qualify for 90 percent loan-to-value and have to come up with the rest out of pocket. Some lenders may require as much as 20 percent down, particularly for condominiums in markets where it’s difficult to get mortgage insurance.

 

Who they’re good for: Conventional loans are ideal for borrowers with excellent credit who can afford a down payment of 5 percent or more.

 

 

 

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This entry was posted on Sunday, August 16th, 2009 at 7:40 pm and is filed under How to Purchase a Home. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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