Conventional Loan Guide
- Christopher BrendanAuthor
- Mortgage TypesCategory
Conventional Loan Guide
If you’re shopping for a mortgage you’re probably already aware of how difficult it is to qualify these days. While many lenders are looking to fund only those with exceptional credit, there are still lenders willing to fund home owner dreams. Before selecting a lender or going with a particular type of mortgage, it’s important to speak to a mortgage broker. They posses a wealth of knowledge, and can help steer you towards the right mortgage product. While a conventional loan is an older and more general mortgage product, it still may be the best product for you.
Since the Recession and housing bust of 2007, many other loan types vanished, and conventional loans became more popular. To begin to understand conventional loans it’s important to understand the difference between this type of loan, and other loans. Conventional loans are not made or insured by a government entity, also known as a non-GSE or non-government sponsored entity. FHA and VA loans are government loans. The down payment requirement for a conventional loan is often higher than FHA or VA loans for this reason. FHA loans require a 3.5% down payment, while VA loans require no down payment at all.
To take out a conventional mortgage loan you can go to a bank, savings and loan, credit union, or mortgage broker who funds their own loans or brokers them. When deciding upon a conventional loan pay attention to two main factors: term of the loan and loan-to-value ratio.
The LTV is generally around 80%, but it can be lower if the borrower is comfortable. However, if the LTV is higher than 80%, lenders will require that the borrower pay for private mortgage insurance. The term of a mortgage loan is dependent on the borrower, and what they can afford. Generally homeowners go for 15-year terms or 30-year terms, but 20-year and 40-year terms are available to those who qualify. To secure longer terms you have to qualify, show excellent credit history, etc. The shorter your terms the less interest you will pay, but the higher your payments will be. Consider your budget and household expenses before deciding on a mortgage term. To calculate monthly payments and get estimates use the Home Sweet Lender mortgage calculator tool.
Adjustable Conventional Loans
If you qualify for an adjustable-rate conventional loan your rates can fluctuate. Certain loans are fixed for a specified amount of time, then become adjustable-rate loans. Three popular types of adjustable conventional loans are:
- 3 / 1 ARM. This loan is fixed for 3 years, and then it begins to adjust for the remaining 27 years.
- 5 /1 ARM. This loan is fixed for 5 years, and then it begins to adjust for the remaining 25 years.
- 7 / 1 ARM. This loan is fixed for 7 years, and then it begins to adjust for the remaining 23 years.
While you may prefer the stability of a traditional amortized loan, an adjustable conventional loan may be what you need to help with the first years of re-payment. Features of adjustable conventional loans include:
- The initial interest rate is lower than the rate for a fixed-rate loan.
- There is a maximum amount the loan can adjust over the life of the loan known as a cap rate.
- The interest rate is determined by adding a margin rate to the index rate.
- Adjustment periods can be monthly, every six months, or every year, among other choices.
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