What Are Conventional Loans?
Conventional mortgage loans are the most common type of mortgage offered by credit unions, banks, online lenders and other financial institutions. Conventional financing can come with a fixed or adjustable interest rate.
At the Credit Union of Southern California (CU SoCal), our home financing specialists can tell you all about conventional home loan requirements for buying a house and help you decide if conventional financing is right for you.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgage options, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
What is a conventional mortgage loan? Read on to learn more about conventional financing.
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Types Of Conventional Loans
There are numerous types of conventional loans, but first it’s important to define conventional financing.
What is a conventional mortgage loan? Conventional loans are not backed by a government agency, such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Department of Agriculture (USDA) loan programs.
Let’s take a closer look at each loan type:
1.
Conforming Conventional Loans. These loans conform to guidelines set by Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association), agencies that were created by Congress to provide liquidity, stability, and affordability to the mortgage market. These agencies provide thousands of banks, savings and loans, and mortgage companies with access to funds on reasonable terms, which is then used to make mortgage loans for consumers.
After a loan is closed and a home purchase completed,
Freddie Mac and Fannie Mae buy conventional conforming mortgage loans from lenders and either hold these mortgages in their portfolios, or package the loans into mortgage-backed securities (MBS) that may be sold. Lenders use the cash raised by selling mortgages to engage in further lending.
2.
Non-Conforming Conventional Loans. These are loans that do not conform to Freddie Mac and Fannie Mae guidelines. One example of non-conforming loans is a Jumbo loan, used for large mortgage amounts.
3.
Fixed-Rate Conventional Loans. Conventional Loans can have a fixed rate or adjustable rate. A fixed-rate Conventional Loan is one that has a fixed interest rate for the duration of the loan term, typically 10, 15, 20 or 30 years.
4.
Adjustable-Rate Conventional Loans. Adjustable rate mortgage (ARM) loans start with a low introductory interest rate that is adjustable or may be fixed for a short period of time. When the introductory rate expires, the interest rate will become variable and borrowers could end up with large monthly mortgage payments.
5.
Low Down Payment Conventional Loans. A low down payment loan requires less that the 20% down that is typical with a standard conventional loan. Putting 20% down on a home purchase will eliminate the need to pay Private Mortgage Insurance (PMI), and reduce the amount of the mortgage loan that’s needed, which means the buyer pays less interest on the loan. It is possible to get a conventional loan with 3% to 15%, depending on the loan you choose and the lender’s criteria.
6.
Conventional Renovation Loans. Renovation mortgages permit borrowers to include financing for home improvements in a purchase or refinance transaction on existing homes. This program has no income limits and the minimum credit score required is 620.
7.
Portfolio Loans. A portfolio loan is one that a lender will keep in their loan portfolio and service, as opposed to selling the loan to another servicer.
8.
Non-Qualified Mortgages. Also called non-QM, these loans are not guaranteed by the federal government and can’t be sold by the lender to Fannie Mae and Freddie Mac. Not all lenders do non-QM loans, but the ones that do offer broader qualifying criteria, which makes it easier for self-employed individuals, seasonal employees, investors, and others with less-traditional income streams to qualify.
Conventional Home Loan Requirements for Buying a House
As with all loans, the qualifying requirements will vary depending on each lender’s unique criteria. Some basic requirements include:
- A minimum 620 credit score.
- Debt-to-Income (DTI) ratio up of 50%. The required ratio may depend on the lender’s requirements, the borrower’s credit score, and other factors.
- Conforming Loan Limit. According to the Federal Housing Finance Agency (FHFA), the conforming loan limits (CLLs) for mortgages to be acquired by Fannie Mae and Freddie Mac (the Enterprises) in most of the U.S. for one-unit properties is $647,200.
Differences Between Conventional Loans and Government-Backed Loans
Government-backed loans are not considered conventional, as they are insured by the federal government. This insurance protects the lender, to some degree, if a borrower defaults (fails to repay the loan).
The following government-backed loans were created to assist homebuyers who have lower credit scores or unique circumstances that may prevent them from being approved for a conventional mortgage:
FHA Loans. Popular among first-time homebuyers, FHA loans require a minimum 580 FICO score. Borrowers with at least a 580 or higher may be eligible for an FHA loan with only a 3.5% down payment on a home purchase. Borrowers with a FICO score as low as 500, may qualify for an FHA loan if they can make a down payment of 10%.
VA Loans. Insured by the U.S. Department of Veterans Affairs, VA loans are available to qualifying U.S. Armed Forces veterans, active duty service members, certain reservists and National Guard members, and certain surviving spouses of deceased veterans. VA loans often do not require a down payment. There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile.
Learn more about VA loans.
USDA Loans. This
government loan program helps low and very-low-income applicants obtain housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability. Payment assistance is a type of subsidy that reduces the mortgage payment for a short time. The amount of assistance is determined by the adjusted family income.
Advantages Of Conventional Loans
Low Interest Rates. Borrowers with good credit can benefit from lower interest rate offers.
Higher Loan Limits. More money is available if borrowers meet the lender’s credit, income, and debt-to-income requirements.
Flexibility. Because conventional loans aren’t government-backed, this gives lenders more flexibility in their lending criteria.
Disadvantages of Conventional Loans
Conventional loans have specific guidelines for lenders and borrowers, making these loans somewhat more challenging to qualify for, especially if the borrower has
bad credit or less money for a down payment.
Stricter Qualifying Requirements. Because these loans aren’t backed by the government, lenders impose stricter guidelines and requirements to ensure that they are protected if the borrower fails to repay the loan.
Higher Credit Score Requirements. Borrowers may only be approved with a credit score of 620 or higher. Borrowers with higher credit scores benefit from being offered a lower interest rate.
Higher Down Payment Requirements. Most lenders will require a 20 percent down payment on a purchase, and charge PMI (private mortgage insurance) on loans that have less than 20 percent down. PMI is added to the borrower’s monthly mortgage payment and protects the lender financially if the borrower defaults.
How to Get a Conventional Loan
Start by visiting your local credit union or bank where you currently do business. You may be able to get favorable rates and terms by applying for a mortgage at a lender who already knows you.
Other requirements generally include, but are not limited to:
- Proof of identity, including Social Security number and driver’s license.
- Proof of income and assets, including paystubs and financial accounts.
- Proof of financial debt, including current rent or mortgage statements.
- W-2s or 1099s (two years).
- Bank statements.
- Proof of alimony or child support (paid or received).
Where to Get a Conventional Loan
Credit unions, banks, and online lenders all offer conventional financing.
However, when it comes to choosing a mortgage lender, credit unions are often the preferred choice for several reasons.
Credit unions are not for profit organizations owned and controlled by the Members who use their services, and they operate to promote the well-being of their Members. Profits made by credit unions are returned back to Members in the form of reduced fees, higher savings rates, and lower loan rates.
There are many
advantages to banking at a credit union. Higher returns, better savings, low- or no-fee loans, low interest on borrowings, and a sense of community – are just a few of the benefits of membership at CU SoCal.
CU SoCal Mortgages and Home Loans
Ready to get a mortgage? CU SoCal can make it happen with:
- Down payments as low as 3%.
- Fast pre-approval.
- Fixed, adjustable-rate and interest only loans
- Competitive rates
- Financing up to $3 million.
- Flexible terms of 10-, 15-, 20-, and 30-years.
- Fast financing.
- Professional guidance.
- Flat lender fee of $995.
- Realtor rebates.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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