A Conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate. ... Conforming loans. Non-conforming loans.
We advise first-time home buyers to meet with a mortgage broker before deciding on a loan because mortgage brokers carry a vast array of products, including the tired and boring old conventional loans. A bank can make a conventional loan, too, but generally, a bank's product line is limited and particular only to that bank. Whereas a mortgage broker can broker loans through any number of banks.
After the mortgage meltdown of 2007, many of the exotic types of loans vanished, and conventional loans regained a prominent position in real estate markets.
Conventional loans maintain a reputation of being a safe type of loan, and there are a variety of conventional loans to choose from as well.
The main difference between a conventional loan and other types of mortgages is the fact a conventional loan is not made by a government entity nor insured by a government entity. It's what we refer to as a non-GSE loan. A non-government sponsored entity.
Amortized Conventional Loans
Home buyers can take out an amortized conventional loan from a bank, a savings and loan, a credit union or even through a mortgage broker that funds its own loans or brokers them. Two important factors are the term of the loan and the loan-to-value ratio:
97 percent LTV with a common 30-year term (or 20, 15 or 10)
95 percent LTV with a common 30-year term (or 20, 15 or 10)
90 percent LTV with a common 30-year term (or 20, 15 or 10)
85 percent LTV with a common 30-year term (or 20, 15 or 10)
80 percent LTV with a common 30-year term (or 20, 15 or 10)
The LTV can be lower than 80 percent.
It can be whatever is comfortable for a borrower. If the LTV is higher than 80 percent, lenders require that borrowers pay for private mortgage insurance*. The term of the loan can be longer or shorter, depending on the borrower's qualifications. For example, a borrower might qualify for a 40-year term, which would significantly lower the payments. A 20-year term loan would raise the payments. Here are a few examples of how the payments can change depending on the term of the loan:
A $200,000 loan at 6 percent payable over 20 years would result in a payment of $1,432.86 per month.
A $200,000 loan at 6 percent payable over 30 years would result in a payment of $1,199.10 per month.
A $200,000 loan at 6 percent payable over 40 years would result in a payment of $1,100.43 per month.
A fully amortized conventional loan is a mortgage in which the same principal and interest payment is paid every month, from the beginning of the loan to the end of the loan. The last payment pays off the loan in full. There is no balloon payment.
Conforming loan limits are $417,000. A minimum FICO score for a good interest rate is higher than those required for an FHA loan. Loan limits above $417,000 are considered agency loans, and some are jumbo loans and the interest rates are higher.
*Some conventional loan products allow the lender to pay the private mortgage insurance.
Mortgage interest rates have been creeping up lately, and many home buyers are going with more traditional, fixed-rate loans.
However, adjustable-rate mortgages (ARMs) still have their place for those who understand or know how to use them. Here are the basics.
What exactly is an ARM? Besides a loan whose rate adjusts, an ARM is two loans in one. The designation of an ARM, such as 3/1, 5/1, or 7/1, means that the initial rate of the loan is fixed for three, five, or seven years, respectively, and then the rate may start to adjust, depending on market conditions.
The two components that make up the interest rate of an ARM are called the margin and the index.
The Margin is set by the lender and agreed to by the consumer, and it will remain constant throughout the life of the loan.
The Index which is based on an economic indicator such as certain government securities, can and will fluctuate.
This is what causes a mortgage rate to change. The margin and index are added together to create the interest rate a mortgage consumer pays, which will adjust over time.
If considering an ARM, borrowers should understand how often it can adjust and how much it can adjust when it does. There are floors and ceilings that dictate how much the interest rate of an ARM can fluctuate.
Who would benefit from an ARM? The simple answer is anyone with a short-term financing goal, meaning either an average consumer or an investor who only wants to hold a property for a specific period of time.
The benefit of a loan with a fluctuating rate boils down to the initial interest rate. The initial ARM interest rate may very well be lower than current fixed-rate products.
For example, consumers who plan to sell their property in five years, after the kids move out, may want to enjoy the benefits of the lower rate. They know they will be out from under the mortgage before it can adjust upward.
What else do consumers need to know about ARMs? Two things. The first is that plans often change. If they opt for the ARM over the fixed-rate mortgage loan, and their plans change down the road, they could find themselves sitting on a mortgage that has an increasing payment.
The second concerns qualification. ARMs are harder to qualify for than fixed-rate mortgages, especially since the real estate meltdown.
With the fixed-rate product, you qualify for the rate where it is now and where it will be for the life of the loan. With an ARM, you qualify for a payment as it could be, were it to be at its highest. This is known as the fully indexed rate. This alone will keep a large number of income-challenged borrowers from being able to qualify.
If you have additional questions about ARMs or want to determine whether this loan product is right for you, contact your mortgage partner for details.