The Ins and Outs of Conventional Mortgages

A "conventional mortgage" is a home loan that is not insured or guaranteed by government agencies such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA). Instead, conventional mortgages adhere to the underwriting guidelines set forth by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These types of mortgages are among the most common home financing options available.

Key Takeaways

Key Features of Conventional Mortgages

1. Down Payment: Conventional loans often require a higher down payment than government-backed loans, typically ranging from 3% to 20% of the home's purchase price. Borrowers who put down less than 20% must purchase private mortgage insurance (PMI) until they have enough equity in the home.
2. Credit Score Requirements: Borrowers typically need a higher credit score to qualify for a conventional mortgage than government-insured loans. The interest rate and loan terms can be more favorable for those with excellent credit scores.
3. Loan Limits: The FHFA sets the maximum loan limits for conventional loans. These limits can vary depending on the cost of living in different areas. Loans that exceed these limits are considered "jumbo loans" and are subject to different underwriting standards.
4. PMI Cancellation: Unlike FHA loans, which require mortgage insurance for the life of the loan for down payments of less than 10%, PMI on conventional loans can be canceled once the borrower reaches 20% equity in the home.
5. Flexibility in Use: Conventional mortgages can be used for a primary residence, a second home, or investment properties, offering flexibility not always available with government-backed loans.

Benefits of Conventional Mortgages

• Variety of Terms: Conventional loans offer various repayment terms, including popular 15-year and 30-year fixed-rate and adjustable-rate mortgages (ARMs).
• Competitive Interest Rates: Borrowers with strong credit can secure competitive interest rates, which can potentially lead to lower monthly payments and less interest paid over the life of the loan.
• No Upfront Funding Fees: Unlike some government-backed loans that require upfront funding fees, conventional loans do not have such requirements, reducing initial borrowing costs.

Considerations

While conventional mortgages offer several benefits, they might not be the best fit for every borrower, especially those with lower credit scores or minimal savings for a down payment. Exploring all available loan options, including government-backed mortgages, is crucial to finding the best mortgage solution based on individual financial situations and goals.

FAQs

1. How does the interest rate on a conventional mortgage compare to government-backed loans?

Interest rates on conventional mortgages can be competitive with or sometimes lower than those on government-backed loans, depending on the borrower's credit score, down payment, and other financial factors. Borrowers with high credit scores and larger down payments are more likely to secure lower interest rates on conventional loans.

2. Can I refinance from a government-backed loan to a conventional mortgage?

Yes, borrowers can refinance from a government-backed loan to a conventional mortgage. This might be advantageous for eliminating the need for mortgage insurance or obtaining better loan terms. Refinancing decisions should be based on carefully analyzing potential savings, loan costs, and how long you plan to stay in the home.

3. What happens if I default on a conventional mortgage?

Defaulting on a conventional mortgage can lead to foreclosure, where the lender seeks to recover the loan balance by selling the property. The foreclosure process and borrower's rights can vary by state. It's crucial to communicate with the lender at early signs of financial trouble, as options may be available to avoid foreclosure.