A conventional mortgage is typically the first choice of homebuyers with exceptional credit profiles. These mortgages offer better terms and reward borrowers for their strong credit scores and meeting the requirements for the mortgage.
Conventional mortgages are a great option for those that qualify, and for good reason. But for those that don’t, not all is lost. There are other mortgage options that may better suit your needs when it comes to buying a home and getting a mortgage.
This article discusses conventional mortgages and when it might be a good time to consider using one for a home loan.
Requirements for a conventional mortgage:
Conventional mortgages surprisingly have low down payment requirements, only at 3 percent. However, homeowners who make a down payment of under 20 percent may need to pay PMI, also known as private mortgage insurance.
PMI is a monthly assessment to account for the risk the lender assumes when issuing loans to borrowers with low down payments. Making a lower down payment means you have less “skin in the game” and it’s more likely you may default on your loans.
Monthly insurance premiums (MIP) are different from private mortgage insurance but serve the same purpose. The up front monthly insurance premium (UFMIP) is an assessment that is paid upfront on all FHA loans to compensate the Federal Housing Administration for lending to first time homebuyers and borrowers with lower credit scores.
It’s important to know that conventional mortgages also have credit score requirements that limit how much a lender can lend and the interest rate that they qualify for. Credit scores on conventional loans must be higher than 620, and most lenders run a credit report to verify that your credit qualifies you for the loan.
Conventional vs. VA
Conventional mortgage and VA loans are often compared to each other for their stark differences. The Veterans Administration (VA) issues loans to military veterans and their families and makes it easy for military members to afford a home and raise a family.
Borrowers who don’t qualify for a VA loan often consider conventional loans as the next best option. However, VA borrowers should keep in mind that you’ll be required to pay a funding fee which offsets the costs to taxpayers and allows you to assume the mortgage.
Conventional vs. FHA
We mentioned the Federal Housing Administration above since most new homeowners weigh the options between FHA and conventional loans. The FHA loan also has lower down payment requirements which means that most borrowers don’t pay a large down payment at closing.
Conventional mortgage rates fluctuate frequently and there are no hard and fast rules about how interest rates work with conventional mortgages.
However, conventional mortgages typically hover below FHA loans and higher than VA loans. The best way to get started with a conventional mortgage is to talk with a real estate agent who can connect you with a lender that meets your needs.
Contact Marshall Pastore at 804-234-4480 for more information on buying and selling a home in Richmond.