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What is a Conventional Loan?
A conventional mortgage loan is one that satisfies the criteria for Freddie Mac (FHMC) or Fannie Mae (FNMA) for insurance or backing. FNMA and FHMC are both government-sponsored mortgage companies that buy mortgage loans, enabling banks to offer mortgage rates that are often lower than those for jumbo loans or unconventional loans.
These two organizations publish loan limit guidelines each year that specify the minimum loan amount that mortgage loans must fall beneath in order for them to be purchased or backed. The maximum amount for a conventional loan this year has been set at $647,200 nationwide. To counteract the higher cost of living, many high-priced locations in Tennessee, such as Brentwood and Franklin, have higher conventional loan limits.
When purchasing a primary residence, first-time homebuyers may be able to obtain a conventional mortgage with a down payment of as little as 3%. If you are not a first-time home buyer, a conventional mortgage can still be acquired with a down payment as low as 5%. Borrowers who want to buy a multi-family home must put down 15% of the buying price. You will need at least 10% down to buy a second home or vacation property, and this amount rises to 15% down to buy an investment property.
If you’re buying a house and you have a down payment of less than 20%, you’ll need to pay for private mortgage insurance (PMI). In the event that you default on your mortgage loan with low equity in your property, private mortgage insurance is put in place to safeguard your mortgage. On a $300,000 loan with a 5% down payment, the cost of PMI for borrowers with acceptable credit can be as low as $90 per month. The good thing about PMI is that you won’t have to pay it forever. PMI is paid monthly as part of your mortgage payment each month.
When your property gains 20% more in equity, you can either refinance or check with your mortgage servicer to see if there are any alternative ways to get rid of your PMI without having to refinance. Paying off the debt on your mortgage is an additional choice. As long as a specified amount of time has passed after you bought your house, your mortgage lender will automatically eliminate your PMI once you’ve paid 22% of the initial purchase price.
Credit Score: In most cases, borrowers will need to have at least a 620 credit score to obtain a conventional mortgage. However, having a higher credit score may provide benefits such as better financing terms.
Your DTI is a percentage that explains to the lender how much of your monthly pre-tax income is used to pay debts. The debts that are used to calculate your DTI only include those that are reported on your credit report and exclude debts such as medical bills, cable bills, cell phone bills and other utility bills.
Your loan must be within the Fannie Mae and Freddie Mac loan restrictions in order to be considered a conforming conventional loan. The conforming loan ceiling for a single-family house in 2022 is $647,200. The loan amount is subject to annual adjustment. The restriction has certain exceptions. In order to offset the greater cost of living in states such as Alaska, Hawaii, and other high-cost regions of the US, loan limits in these places are higher and can go up to $970,800. Visit the Federal Housing Finance Agency website to see the loan restrictions for your potential area.
Conventional loans usually offer the best terms for financing your primary home, second home or investment property. To find out what types of financing you would qualify for click the link below or call us at 844-4MODERN today!