CONVENTIONAL LOANS
What are Conventional Loans
A Conventional Mortgage is a type of home loan that is not backed by the government like a FHA or VA loan.
It is typically issued by a private lender such as a bank, credit union, or savings and loan association, and is available to those who meet certain income and credit criteria.
Conventional Mortgages are usually a long-term loan, which is paid back in monthly installments over a period of 15 to 30 years. They are used to purchase a home or refinance an existing mortgage, and the interest rate can be either fixed or adjustable.
Conventional Mortgages are considered a popular option due to their flexibility and potential for lower interest
rates compared to other loan types.
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Conventional Mortgages are considered a popular option due to their flexibility and potential for lower interest rates compared to other loan types.
Conventional Mortgage Requirements
The eligibility criteria for a Conventional Mortgage may vary among lenders, but generally, the following factors are considered:
- Credit Score: A good credit score, usually a minimum of 620, is required to qualify for a Conventional Mortgage. The higher the credit score, the better the chances of being approved and receiving a lower interest rate.
- Debt-to-Income (DTI) Ratio: The DTI ratio is calculated by dividing the borrower’s monthly debt payments by their monthly gross income. Most lenders require a DTI ratio of 45% or lower but with positive compensating factors, up to 50% is possible.
- Employment and Income: Proof of steady employment and a stable income is required. Most lenders also have a minimum income requirement, usually around $50,000 per year.
- Down Payment: A down payment minimum amount of 3% is possible and some approvals may required a higher percentage. A larger down payment can improve the chances of being approved and reduce the overall cost of the loan.
- Property Type: The borrowers can use a conventional mortgage to purchase a second home, investment property, or even a vacation home.Residency: The borrower must be a U.S. citizen or permanent resident.
These are general eligibility criteria, and the specific requirements may vary depending on the lender. It is always a good idea to check with multiple lenders to compare their eligibility criteria and find the best option for your individual situation.
Pros and Cons of Conventional Loans
When considering a conventional loan there are pros and cons, below are a few things to consider when looking at a conventional mortgage.
Pros of Conventional Mortgages
-Lower Interest Rates: One of the primary benefits of a conventional mortgage is that the interest rates tend to be lower than those offered by other types of loans, such as FHA and VA loans. This is because the lender assumes the risk and sets their own interest rates, and competition among lenders can drive rates down.
-More Flexibility with Down Payments: Another advantage of conventional mortgages is that there is more flexibility with down payments. Borrowers can put down as little as 3% or as much as 20% of the home's value, depending on their financial situation and the lender's requirements. This can make it easier for borrowers to purchase a home, especially if they don't have a lot of cash on hand.
-Less Restrictions on Property Types: Conventional mortgages also offer less restrictions on property types. For example, borrowers can use a conventional mortgage to purchase a second home, investment property, or even a vacation home. This makes it easier for borrowers to purchase the property that best suits their needs.
-No Mortgage Insurance Required: Unlike FHA and VA loans, conventional mortgages do not require mortgage insurance, even for borrowers putting down less than 20%. This can save borrowers hundreds of dollars per month, depending on the loan amount and interest rate.
Cons of Conventional Mortgages
-Higher Credit Score Requirements: One of the major disadvantages of conventional mortgages is that they typically have higher credit score requirements than other types of loans. Borrowers typically need a minimum score of 620 to be approved for a conventional mortgage, and the higher their credit score, the better interest rate they will receive.
-Higher Down Payments Required: Another disadvantage of conventional mortgages is that they often require higher down payments, especially for borrowers with lower credit scores. This can make it harder for some borrowers to purchase a home, especially if they don't have a lot of cash on hand.
-More Difficult to Qualify: Conventional mortgages can also be more difficult to qualify for than other types of loans, especially for borrowers with lower credit scores, income, or assets. Borrowers need to provide detailed financial information and prove their ability to repay the loan, which can be a lengthy and complicated process.
-No Government Insurance: Finally, conventional mortgages do not have government insurance, which means that the lender assumes all the risk of the loan. This can be a disadvantage for borrowers, as the lender may be more strict in their lending practices, requiring higher credit scores, down payments, and more.
Conventional Loan Conclusion
In conclusion, conventional mortgages offer many advantages, including lower interest rates, more flexibility with down payments, no mortgage insurance requirement, and less restrictions on property types. However, they also have disadvantages, such as higher credit score requirements, higher down payments, more difficult to qualify, and no government insurance. It’s important for borrowers to weigh the pros and cons of a conventional mortgage and carefully consider their financial situation and future goals before applying for a loan.
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LeaderOne Financial Corporation
1111 W 22nd Street, Suite 620, Oak Brook, IL
NMLS ID 1594823
