Your Complete Guide to the Conventional Home Loan
- SECTION 1: What is a Conventional Loan?
- SECTION 2: Am I Eligible for a Conventional Loan?
- SECTION 3: Conventional Loan Benefits
- SECTION 4: Conventional Loan Rates
- SECTION 5: First-Time Homebuyers
- SECTION 6: Conventional Jumbo Loans
- SECTION 7: Refinancing with a Conventional Loan
- SECTION 8: Contract Guidelines
- SECTION 9: The Conventional Loan Process
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What is a Conventional Loan?
Video: The Conventional Loan Process
Conventional loans are common loans that are backed by Fannie and Freddie Mac. They are defined as loans with no special needs or requirements such as FHA or VA loans. The conventional loan and loan process has been simplified over the years to allow greater access to borrowers (you). This makes obtaining a loan as a first-time home buyer, refinancers, investors, and others looking for traditional lending. Conventional loans often have stricter lending requirements, but the benefits of meeting those requirements include lower rates, lower down payment requirements, and higher resell offers on your future home. When you are ready to buy your home, your Orbit Home Loan broker will work to secure your best options. These mortgage professionals bring together borrowers and lenders so that borrowers can compare different options catered to their needs. If you're ready to start your conventional loan, check your eligibility or have specific questions on the conventional loan, talk with a Home Loans specialist today.
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NOTE: Loan Chart
How Do Conventional Loans Work?
Conventional Loan Process
Orbit Home Loan mortgage brokers work on your behalf with our many national lender partners to get you the best value on a mortgage. A conventional mortgage typically has repayment periods of 15 or 30 years. Once you're approved for a mortgage loan and purchase your home, your lender will likely sell the rights to your loan to Fannie Mae or Freddie Mac. However, they will still be responsible for collecting your payments and will continue to function as the servicer of your loan.
When you borrow money, you have to pay back not just the amount of money that you borrowed but also an interest. The interest rate determines how much the borrow pays in addition to their principal also referred to as interest. The interest that is collected, goes towards making more funds available for other home buyers. Interest rates on conventional loans vary depending on your personal financial circumstance.
Conforming VS Nonconforming
In the US, there are two federally run institutions that oversee a large portion of mortgage lending: Fannie Mae and Freddie Mac. The important takeaway is that conforming loans abide by lending standards put in place by Fannie Mae and Freddie Mac. Most importantly, these limits determine the possible size of the loan; for a single-family home, the loan limits are based on your county of residence.
Some loans, called Jumbo or Non-QM loans, go beyond the County borrowing limits or conforming guidelines. These loans can have different limits, rules, and conditions. They are a bigger risk for lenders, so they usually come with higher interest rates in order offset the risk. Non-QM loans are not necessarily bad loans, but they do carry a higher level of risk. It's important to read the fine print when shopping around for a loan, and make sure to compare rates before committing to any lender.
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Types of Conventional Loans
1. Conforming Conventional Loans
A conforming loan is one that is less than the maximum loan amount set by the Federal Housing Finance Agency and meets additional loan standards set by Fannie Mae or Freddie Mac. Conforming loans are also sometimes referred to as “GSE Loans” because Fannie and Freddie are government-sponsored enterprises.
2. Nonconforming Conventional Loans
If a conventional loan exceeds conventional loan limits or uses underwriting standards that are different from those set by Fannie Mae and Freddie Mac, it’s called a nonconforming loan. A jumbo loan and Non-QM loan are a common type of nonconforming conventional loan.
3. Fixed-Rate Conventional Loans
With a fixed-rate conventional loan, the interest rate stays the same for as long as you have the mortgage. This usually means a lower monthly payment, which is why many people choose it. But you can also choose a shorter term if that's what you want. Typically, buyers choose a 30-year fixed rate conventional loan.
4. Adjustable-Rate Conventional Loans
Adjustable-rate mortgage or ARM rates usually adjust annually, after an initial fixed-rate period. Conventional loans with adjustable rates, also known as hybrid ARMs, have rates that may go up or down over time which is what makes them adjustable.
5. Low-Down-Payment Conventional Loans
There was a time when you needed to put down 20% of the home's value in order to get a conventional loan. But those rules have changed. Now, if you can afford to put down at least 3% - 10%, you might be able to get a conventional loan.
6. 3% Down Payment
Home Ready and Home Possible are conventional mortgage options that allow down payments as low as 3%. If you qualify for a 3% down payment through one of these programs, you’ll need to finance the other 97%.
7. 5% Down Payment
Borrowers with lower credit scores might be required to make a down payment of 5% or more to get a conventional loan. This is sometimes referred to as a “5 down conventional loan” or a “conventional 95 mortgage.”
8. Conventional Renovation Loans
Buying a fixer-upper is one way to find a home in your budget. The CHOICE Renovation loan and Home Style loan are two types of conventional renovation mortgages that allow you to finance a home purchase, as well as the necessary renovations, at the same time.
Not sure what type of loan is right for you? Use the tool below to help you find out.
Exploring The Conventional Loan
Conventional Purchase Loan
Conventional loans have helped generations of buyers become homeowners. Conventional loans can help you purchasing a new home, an existing home, a condo, a manufactured home, or a multiunit property. The specific policies and guidelines for obtaining a conventional loan vary from lender to lender, but Orbit Home Loan offers many different options for lenders to our customers so we can find the right option for you.
Conventional Cash-Out Refinance
A conventional Cash-Out refinance allows homeowners to take out cash from their home's equity. This type of loan is open to borrowers with or without a current conventional loan. Most lenders will allow you to borrow up to 90% of your home's value, but this amount may vary. You are not required to take out cash with this loan, which means borrowers with non-conventional mortgages can use it as a basic rate-and-term refinance.
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Conventional Loan Limit
The conforming loan limit is designated by county. Most counties are assigned the baseline conforming loan limit. However, there can be variations on the conforming loan limit based on regional economic differences.
For example, in areas where 115% of the local median home value exceeds the baseline conforming loan limit, the maximum loan limit for that area will be set higher. HERA (Housing and Economic Recovery) sets the maximum loan limit for such areas as a multiple of the area median home value. The legislation also set a ceiling on the limit of 150% of the baseline loan limit.
Convectional Funding Fee
Do not worry, as some loan products do have additional funding fees, conventional loans do not. This is one of the many benefits of taking on a conventional loan.
Is The Conventional Loan a Good Option?
Conventional loans are very powerful loan options. They come with a lot of benefits. For example, if you have a good credit score and not much debt, you can get a conventional loan. This is a great option because you can avoid paying for private mortgage insurance (PMI). If you don't have enough money to pay 20% of the loan upfront, don't worry! Conventional loans are available with down payments as low as 3%.
How Do I Get a Conventional Loan?
Talk with a trusted lender that knows conventional loans and how to get the most from this hard-earned benefit. The process typically starts with getting pre-approved, which can often be done in minutes using your phone, laptop or tablet.
Loan pre-approval is a key first step before making an offer on your dream home. Having that pre-approval letter gives you a clear sense of your buying power and shows sellers and listing agents you have what it takes to get to closing.
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If I’ve previously used a Conventional loan, can I use it again?
Yes, this is not a one-time option. Once you use the conventional loan benefit, it's yours for life. You can reuse the conventional loan over and over again, and it's even possible to have more than one active conventional loan at the same time.
Continue to learn more about conventional loan in our next section.