So, the time has finally come that you have decided to finally buy your dream home.
Congratulations! But, before you can start your property search, there is one thing that you need to take care of first—getting financing for your purchase.
Conventional mortgage loans are one of the most popular options when it comes to financing a home.
But with so many different types of mortgages available today, it can be difficult to know which is the best choice for you. But there is no need to fret—we are here to help!
This guide will teach you everything you need to know when taking out a conventional home loan.
From its benefits to managing your mortgage payments, we got you covered. So, get ready to become a mortgage loan pro in no time!
What Is A Conventional Mortgage Loan?
Conventional mortgage loans are the most common type of home loan available to home buyers.
It is a home financing product that is not backed by the government, which means that it is administered by private lenders and investors.
These loans are typically issued for periods of 15 or 30 years, and interest rates can vary depending on how much money you borrow and your credit score.
One thing to remember about conventional mortgages is that they require higher credit scores than other types of loans.
Generally speaking, borrowers with good borrowing histories are more likely to get approved for a conventional mortgage.
Also, conventional loans are often restricted to certain maximum loan sizes. As of January 2023, the new conforming loan limits hover between $726,200 to $1,089,300, depending on the city and state as set by Fannie Mae and Freddie Mac.
These figures are a huge increase from the previous year, which means that you can already buy a relatively large home without the need of getting into a jumbo loan.
Benefits Of Taking Out Conventional Mortgage Loans
Generally, there are unique perks that you enjoy from taking out conventional loans. Here are some of them.
Straightforward Terms And Conditions
Conventional mortgage loans are fairly simple to understand. Interest rates and other terms and conditions are spelled out in the loan agreement, so you know exactly what you are getting into before signing on the dotted line.
This makes it easier for you to make informed decisions about your finances. Also, this ensures you will not be in for unwanted surprises down the line.
Flexible Repayment Terms
Another great benefit of conventional loans is their flexible repayment terms. Depending on your financial situation, you can choose to make payments every month or bi-weekly.
Also, some lenders offer interest-only payment options for the first few years. This means that you can use your extra money to pay off other debts or invest in something more lucrative instead of spending it all on mortgage payments.
Ability To Refinance
Most lenders also offer conventional loan refinancing options. This means that you can take out a new loan at a lower interest rate and use the proceeds to pay off your existing mortgage.
Not only will this help you save money in the long run, but it also gives you options if you find yourself in financial difficulty down the line.
In most situations, you can refinance a conventional mortgage any time you want with a different lender.
More Transparent Fine Print
Some unconventional loans might have hidden clauses or terms that are not outlined in the loan agreement. This could leave you feeling frustrated and confused.
With conventional loans, what you see is what you get—and this transparency makes it easier for you to make informed decisions about the loan.
Availability Of Low Interest and Down Payment Options
Especially when you have a good track record of borrowing money, most lenders would be willing to offer you favorable conventional loan rates.
This is because, unlike some other types of loans, conventional mortgages are not backed by the government and this can work in your favor.
Also, you might be eligible for a lower down payment with certain lenders depending on your credit score.
Preferred By Sellers
Lastly, conventional loans are highly preferred by sellers since they offer a more stable form of financing.
With this type of loan, the seller knows that you have already been approved and that there is less of a risk of default.
This makes it easier to close on a deal quickly and move onto your new home sooner than later.
Now that you know what a conventional mortgage is and the benefits it offers, it is time to shop for one!
Types Of Conventional Home Loans On The Market Today
Before you start shopping for conventional mortgage loans, it is best to know your options so you can determine which one would best suit your needs.
Fixed-Rate Mortgages
This is the most popular type of home loan available today. With a fixed-rate mortgage, your interest rate and monthly payments stay the same throughout the term of the loan.
This gives you financial stability as you can plan out your budget ahead of time without worrying about any fluctuations in your payments.
Adjustable-Rate Mortgages (ARMs)
Unlike the fixed-rate mortgage, an ARM comes with a variable interest rate. This means that it can change depending on the market conditions at any given time.
This loan usually starts out with lower initial rates than fixed-rate loans and is typically attractive to buyers who plan on selling their homes within a certain period of time.
However, with ARMs, you would need to stay updated on the market trends and monitor your payments carefully as the interest rate can increase significantly over time.
Hybrid Loans
These types of loans are a combination of fixed-rate and adjustable-rate mortgages. They typically start with an initial period of three, five, or seven years with a fixed rate and then switch to an adjustable rate once the introductory period is over.
This option allows you to enjoy the benefits of both loans—the stability of a fixed-rate loan combined with the initial savings of an ARM.
It also gives you flexibility in case you plan on staying in your home for longer than the initial period.
High-Balance Loans
If you are looking to buy a more expensive home, then a high-balance loan might be your best option.
This type of conventional loan is ideal if you like to buy a home in an area where the conforming loan limit is higher than in other areas.
Of course, high-balance loans tend to have higher interest rates since the amount you are borrowing is higher than with a regular conventional loan.
However, this option still offers more competitive rates compared to other types of loans, such as jumbo or portfolio loans.
Choosing The Right Conventional Home Loan For You
When shopping for conventional home loans, you should weigh your options and determine which type of loan best suits your needs. Here are a few factors to consider.
- Your budget and financial goals
- Your credit score
- The current interest rate environment
- How long you plan on staying in the home
Once you have determined what kind of loan fits your needs, it is time to start shopping for lenders.
Conventional Loan Requirements
You will need to meet certain conventional loan requirements in order to get approved for your mortgage.
Depending on the lender, these requirements include but are not limited to the following.
- A minimum credit score of 620 or higher
- Proof of steady income and employment history
- A down payment of usually 20% of the purchase price
- Documentation for any assets you may have
The lender will also require other forms of documentation depending on your individual situation.
If you are applying for a loan with a co-borrower, they will also need to meet the same requirements and provide all necessary paperwork.
By ensuring you already meet the necessary requirements with a lender, you will have a better chance of getting approved for your loan and closing on the home faster.
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Understanding The Loan Approval Process
It is important to understand that your loan application will go through multiple levels of approval before you can close on the home.
The lender will start by assessing your credit report and all other documents you have provided.
After that, they will evaluate your income and assets to determine if you are able to make the monthly payments in a timely manner.
Once your loan application is approved, the lender will provide you with a loan estimate.
This document will outline the terms and conditions of your loan, including the interest rate, closing costs, etc. Make sure to read through the entire document carefully as it is binding once you sign it.
Lastly, when all paperwork is finalized, you will need to wait for the underwriter to approve your loan before you can receive the funds.
Managing Your Mortgage Payments
Once you have your loan approved and have closed on the home, it is important to stay on top of your mortgage payments.
Paying them on time can help boost your credit score and will prevent any late fees or penalties from accumulating.
You should also remember to factor in taxes and insurance when budgeting for your monthly mortgage payment.
These additional expenses can add up quickly, so it is best to plan ahead and make sure you have enough money set aside each month.
If you find yourself unable to make your payments, contact your lender as soon as possible.
They may be able to offer a different repayment option or work out an arrangement where you pay less for a certain period of time.
Final Thoughts
Finding the best conventional mortgage loans is an important decision and one that you should not take lightly.
Make sure to do your research, weigh all your options, and understand the implications of each type of loan before signing any paperwork.
With a bit of planning and due diligence, you can find the perfect mortgage for your needs and get the keys to your new home in no time. Good luck and happy house hunting!
For more useful tips that you can use in buying a home, feel free to check out the rest of our articles!
