Hi!!! Stacey Christopherson with C4 Elite Real Estate Team and Coldwell Banker in Layton, Utah. We are here our preferred lender, Nigel Farnsworth. He is a Loan officer with American Pacific Mortgage, which is a local company that does a great job for our team. Today we are discussing Conventional Loans. We are fortunate to have a great resource so close by to answer our questions. We have additional blogs on different loan programs such as the VA and FHA so go to our website to see those. Additionally, Nigel’s information is on there as well.
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What is a Conventional Loan?
A conventional Loan is more of a traditional style mortgage. It is not a government loan. It traditionally used to be more of what mom and dad used to finance homes years ago because of those terms were a little bit friendlier.
The requirements for a Conventional Loan are vastly different from other programs as well as for each individual borrower. Every borrower’s terms etc are going to be different across the board. Nigel goes on to say, “When I told you previously that conventional loans were little bit friendlier in the past, now it is the exact opposite. The conventional loan is more of a specific type of loan where people must fit into the set parameters for it to make sense for them.” Conventional Loans are very credit driven and they are product driven regarding the home. Additionally, mortgage insurance drives this program. It is overall the more riskier style loan. However, if you have the best of everything, credit, down payment etc., this can be a better loan for you than any other programs available today.
Collateral and Debt to Income
Conventional Loans are very sensitive when it comes to credit, additionally they are very product driven when it comes to the property itself. You might see different terms for a bigger condo vs. a manufactured home vs. a single-family residence. The risk levels can be a little bit higher. Conventional loans are a risk driven loan, so the more you can alleviate the risk, the better your terms will be. Rates change with debt-to-income (DTI) ratios as well as collateral. We address DTI in other blogs but as a reminder, debt to income ratio is the borrower’s debts and the house payment divided into their income.
On a conventional loan, you can go up to 50% on a debt to income ratio. Once you start going above that, the Fannie Mae systems and the Freddie Mac systems will not allow approval, so it is very sensitive. Comparing to traditional government style loans, conventional Loans are a bit stricter on DTI. There is a hard cap with the conventional style, and they do that for risk. Once they analyze loans that have been in default and they realize their DTI was higher. This used to be the case, so they began capping the DTI. Statistically these people with a DTI of 50% or lower or are less likely to go into foreclosure.
Rates and Down Payment
Again, Conventional Loans are typically the riskier program. Lenders take debt information, collateral, credit score and then determine your interest rate. As said above, the best of everything is going to give you the better rates. The rates are traditionally a bit higher than your government style loans. However, you can be right on par with the government rates if you have everything in order.
A traditional down payment is 5% of the sales price. This is helpful to those consumers moving from one house to another. However, the down payment can be as much as you want, as long as you are above the minimum 5%. If you are a saver, a 20% down payment will decrease your mortgage amount, perhaps lower your interest rate and eliminate any need for PMI.
Do not forget to keep checking back. We will have a blog comparing the Conventional Loan to a FHA Loan. This will be great information when deciding which loan program is best for you when purchasing your new home. C4 Elite Real Estate Team is happy to help you through the process. We have a great team of agents and industry professionals ready to answer all your questions.