If you are looking for a conventional loan, you are on the right track because they require less paperwork, unlike government-issued loans. They are also the most popular type of loan available and are the best choice for borrowers looking to finance the purchase of a home.
Conventional loans are generally easier to get and lower in cost than alternative funding sources.The loan process is more streamlined, meaning you will be approved faster. They also offer competitive rates and flexible payment options, and the loan is backed by the strength of the U.S. economy.
The best part is that companies like District Lending will help do the shopping for you so that you get the best conventional loan faster and at the lowest rate. Read on to learn about other benefits of a conventional loan.
What Are Conventional Loans?
A conventional loan is a type of home loan that is not insured by a government entity. They are usually offered by private companies, like credit unions, banks, and loan companies. However, there are conventional loans that are issued by the Fannie Mae and Freddie Mac corporations.
These government enterprises get loans from lenders and offer them to investors at a specific rate. This is why conventional loans are normally divided into conforming and non-conforming loans. The conventional “conforming” loans must meet the standard set by the Fannie Mae and Freddie Mac enterprises.
What Are the Benefits of a Conventional Home Loan?
They Offer Peace of Mind and are Very Transparent
The conforming loans offered by Fannie Mae and Freddie Mac follow a particular set of rules. This is good for lenders and borrowers because the rules will not change suddenly. With the regulations put in place, it is safe to say that conventional loans are generally safer than other types of loans because they’re backed by the full faith and credit of the U.S. government.
This means that if you default on your payments, lenders will not likely pursue any collection efforts against you or sue you for money owed. Lenders will find other alternatives, such as foreclosure. As much as that is the case, it does not mean that other loans aren’t safer. Loans offered by lending companies are also great and safe, but this will greatly depend on the terms set by the company. Conventional loans are a safer option for most home buyers, to say the least.
Conventional Loans Reward High Credit Scores and Come with Low Rates
You will be lucky enough to get a good conventional loan limit if you have a good credit score. This is because conventional mortgages reward high credit scores with lower interest rates. This is why it is essential to ensure your credit score and income report are top-notch before applying for a conventional loan. If your credit score is damaged, you may need to repair it. Otherwise, you may not qualify for a loan.
Many loans today come with adjustable and fixed-rate terms. With the fixed rate term loan, you will get peace of mind, especially in this challenging time when things are unpredictable. The fixed-rate loan lets you know the interest rate and payment you are supposed to make over time. This eliminates inconveniences and allows you to plan so that you do not default on the loan.
Allows You to Save Money with a Shorter-Term Loan
This is one of the most overlooked benefits of a conventional home loan. The thing with paying off a home loan quickly is that it allows you to save money in the long run. If this is your plan, you should opt for a shorter-term loan of about 15 to 20 years. The best part is that some lenders offer a term of as low as 10 years to pay back your conventional loan. This will allow you to save a lot of money.
Offer Low Down Payment Options for Borrowers
With conventional loans, you can begin with a low-down payment of 3%. If you go this route, you will be required to have mortgage insurance, which will increase the overall loan cost. However, the mortgage insurance does not last throughout the life of your loan. Once you attain the 80% loan-to-value ratio of your appraised value, the mortgage insurance is eliminated.
You Can Purchase Investment Properties and Second Homes
Unlike the VA, FHA, and USDA loans which are mainly meant to purchase the primary residence, with a conventional loan, you can get second homes, rental properties, vacation homes, etc. This means that conventional loans are great for investors, and this is why they are mostly preferred by many people.
Conventional Loans are Easier to Get
Conventional loans tend to have many sellers, which makes them easier to get as long as you have all the requirements necessary. When the market is crowded, you will likely get lenders with the best interest rates. The best part is that District Lending allows you to get an exceptional mortgage rate from the best lenders. They will help you find conventional loan sellers with the best rates to ensure you purchase your home successfully.
Government loans may also be the best option for first-time home buyers since they also come with benefits. The problem is that they require too much paperwork, which might be costly and time-consuming for the borrower. This is one thing that makes most people choose conventional loans over government loans.
Cheaper Closing Cost
Loan closing costs are the expenses associated with the closing of a mortgage. Closing costs include the down payment and other fees related to making your loan payment. Some lenders may charge additional closing costs for a refinance, while others will waive them if you pay an extra fee.
Most government loans come with appraisal fees, origination fees, title insurance, etc. All these fees can be easily overlooked, but they are substantial fees you must pay throughout the loan process and are expensive.
On the other hand, conventional loans tend to avoid most up-front fees, making them very economical. With a conventional loan, the appraisal fees are cut by 10 to 15%. This may not always be the case for all conventional loan lenders, but generally, they are much cheaper than government loans.
High Loan Limits
Conventional loans offer borrowers a loan limit of up to $970,800, and you can get a much higher limit than that. Some lenders will provide you with a loan of up to $2 million with a lower down payment. This will largely depend on the lender you choose. If you do not find a suitable lender, consider getting help from District Lending, as they will help you find a suitable lender faster and easily.
Types of Conventional Loans Available
Now that you know the benefits of a conventional home loan, you must know the types of conventional mortgages you will come across as you do loan research. They include;
- Conforming Conventional Loans: conforming loans are a type of mortgage that adhere to the rules set by Freddie Mac and Fannie Mae. The government bodies set the loan limits by location, the down payment, and the interest rates of the borrowed loans.
- Portfolio Loans: This is a conventional loan that a lender keeps in his portfolio instead of selling to borrowers. The portfolio loan allows the lender to be flexible regarding DTIs and credit scores. This means he does not have to stick to the standards set by Freddie Mac and Fannie Mae enterprises.
- Jumbo Loans: If you want to borrow more than the set limit for conventional loans, you should consider jumbo loans. They offer higher limits but require a higher credit score, a low debt-to-income ratio, and a high down payment. The good news is that some lenders will offer jumbo loans at a low down payment at fixed or adjustable rate terms. This also greatly depends on the lender you find.
- Subprime Loan: If you have a low credit score and a high DTI, do not worry because you can still qualify for a conventional loan. This loan is known as a Subprime loan and is suitable for borrowers with a credit score lower than 620 and a DTI of more than 50%.
- Adjustable-rate loans: Many people only know of a fixed-rate mortgage, which has the same interest throughout the life of the loan. When it comes to adjustable-rate loans, you only pay a fixed interest rate in the first 3 to 10 years, depending on your lending company. After that, the interest rates become adjustable every year, depending on the current state of the market.
- Amortized conventional loans: Amortized conventional loans are paid off in equal monthly installments over 10 to 20 years. Amortization is the process by which the total amount of loan repayment is reduced over time, resulting in a smaller amount being repaid at the end of each month. Amortization can be used to take advantage of current interest rates and term lengths that are not available on longer-term fixed-rate loans. With this, you will have the security of knowing that you have repaid your entire balance in full when it’s due.
How to Qualify for a Conventional Loan
The benefits of a conventional loan are many, which is why most people want to qualify for this type of loan. Here is precisely what you need to do to get approved;
- Have a Good Credit Score: Ensure you have a credit score of 620 and above to qualify for a loan. Alternatively, you can make a larger down payment if you do not meet the credit score required.
- Ensure You Have the Required Down Payment: Conventional loans do not require a large down payment, but the more the down payment, the lower the interest rate.
- Check Your DTI: Lenders will also check your DTI. The maximum should be 43%, but some lenders will accept a DTI of up to 50%.
- Research for a Good Loan Lender: Getting a suitable lender can be challenging, but the District Lending company will help you get a conventional mortgage with a low-interest rate.
- Get Approved: After you have gathered all the necessary information, you can now begin applying. You will first get pre approved. Then the lender will review your details and inform you whether you qualify for the loan.
Once approved for a loan, purchase the intended home and begin the payment process immediately to avoid foreclosure. The most important thing is to ensure you get a suitable lender with a reasonable interest rate. This will ease the work on your part and ensure you repay the loan before it’s due. You can consult a company like District Lending to get an exceptional mortgage rate faster, easily, and cheaply.
Are conventional loans beneficial to first-time home buyers?
First-time home buyers can significantly benefit from conventional loans since they require low down payments, are trustworthy and stable, and can help one save money with the shorter-term option.
Is It easy to qualify for a conventional loan?
All you need is a good credit score, a down payment, a suitable lender, and a lower debt-to-income ratio to qualify for conventional loans. Although requirements may vary depending on lenders, these are the main things most lenders look at.