The Pros and Cons of Conventional Mortgage Loans

So you’re unfamiliar with loans and things seem to feel overcomplicated and confusing. You didn’t go to school for finance but are hearing words like FHA loans and VA loans or maybe you’re in a situation where you’re newly married or soon to be and are looking to purchase a home but want to make sure the bankers are giving you the best advice. In this article, we’re going to give an overview of the Pros and Cons of Conventional Mortgage Loans, the most popular home loan and possibly the best loan for you.

The Pros and Cons of Conventional Mortgage Loans

Conventional Home Loan

Starting off the list is the most common home loan because it typically has the best interest rates, and that is the Conventional Mortgage. A conventional mortgage is a home loan not insured or guaranteed by the federal government, and are required to the guidelines set by Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac are known as government-sponsored enterprises (GSE’s) that buy their mortgages from lenders to sell to investors; in short their job it to make mortgages widely available. There are caveats to conventional loans such as “jumbo” mortgages when loans that are larger than the loan limits set by the GSE’s are made, but still are considered conventional mortgages despite being non-conforming.

In most US properties conforming loan limits are currently higher than $424,100, which covers most people currently in the market seeking loans. Conventional Loans come with several perks and some misconceptions that do need clarifying.

Requirements:

Contrary to popular belief you don’t need a 20% down payment for a conventional loan. You can get approved for a loan with as little as 3-5% down payment, but there are perks that in the long run will save you some money if you can manage to produce 20% up front.

One of those perks is that the Private Mortgage Insurance policy is waived upon a 20% down payment. For example on a $100,000 loan you could typically expect to pay 0.5% to 1.2% of the entire loan amount on an annual basis for a Private Mortgage Insurance fee; meaning that if your PMI fee was 1%, you’d be spending $83.33 per month, or an additional $1,000 a year on a policy that protects the lender if you are unable to pay your mortgage.

The PMI does drop off if you can’t place the 20% down payment once you have 22% equity in your home, but until then you’re paying for a policy that otherwise could’ve been totally avoided.

Additionally the premise of the loan matters just as much, loans are typically approved under the premise that your purchase is because you’re

A) Planning on Occupying it Yourself (owner occupied)
B) This is a 2nd Home For You
C) Investment Properties

Further requirements also need to prove their income and assets with current pay stubs, job histories, W-2 forms, and bank statements. In the case you’re self-employed and seeking to borrow, lenders hedge their odds even more with a 2 year paper trail history of tax returns to determine your eligibility.

The last hurdle in your way for getting approved for a Conventional Loan is making sure you have a credit score generally above at a 640 and higher. Previous things like bankruptcy can cause delays of 4-6 years for applications, and in cases of foreclosures 7 years.

The Benefits:

Conventional loans offer heaps of benefits and typically the most used type of home loan.  Conventional Loans can come in fixed rates, adjustable rates, or hybrids all with their own unique value proposition. Wells Fargo for example has several options to choose from for conforming conventional loans, like 30 year fixed rate, 20 year fixed, rate, 15 year fixed rate, 7/1 ARM, 5/1 ARM, that all offer APR rates of as little as 5%.

Aside from predictable interest rates and APR and the unrequired PMI if paying 20 percent down, NPS liabilities are not included on the decision making for loan approval. The Non Purchasing Spouse (NPS) is left out of the decision making process, opposed to government loans that include your non purchasing spouse’s liabilities into the debt to income ratio.

An additional benefit is lower closing costs in general. Conventional loans have fewer requirements than other types of loans meaning the borrower can have an easier time covering origination fees, legal fees, appraisal/home inspection fees, title insurance and escrow deposits.

The Cons:

When you’re looking for the Pros and Cons of Conventional Mortgages it’s fairly tough to find the cons.

One in particular is that Conventional Mortgages are a FICO Score driven model, meaning that credit score is taken into consideration for your rates and Private Mortgage Insurance Fees. In the case of being under a 660 credit score a better option may be to actually get approved for a FHA loan due to the interest of saving thousands in unnecessary fees.

The Bottom Line:

When searching for the Pros and Cons of Conventional Mortgages, for the average consumer with a healthy credit score of 660 and above (740 and above earning you prime rates) Conventional Loans stand out the most, especially because of their automatic PMI termination once the loan balance reaches 78 percent of the original value. Remember to do your due diligence and investigate further, talk to the professionals, and ask questions to make your home buying experience run as smoothly and happily as possible.

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