Conventional Mortgages

Definition: Conventional loans are just between you and the lender. In other words, the payments aren't guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA). Therefore, banks impose more stringent requirements. They often require 10-20% of the total home value as a downpayment. If they agree to just a 5% downpayment, they will impose a mortgage insurance premium until your equity reaches 10 - 20%.

This premium just adds to your monthly cost. As a result, you need more money to buy the house, and your monthly costs may be higher.

Types of Conventional Loans

Conventional mortgages include fixed rate mortgages, in which the interest rate is the same throughout the life of the loan, and part of each month's payment goes towards paying off the principal and part goes toward interest. They can also be adjustable rate mortgages and interest-only loans, in which the interest rate varies.

They can also be conforming and non-conforming. Most conforming loans are less than $417,000 for a single-family home ($625,000 in Alaska and Hawaii).That's because they must conform to standards set by Fannie Mae and Freddie Mac. These two agencies buy the loans from banks, and resell them as securities on the secondary market. Nonconforming loans are also known as jumbo loans, because they are greater than the $427,000 cutoff.

Conventional Mortgages vs FHA and VA Loans

As long as you qualify for a conventional loan, it will probably take less time to process. The main advantage of the Federal Housing Administration (FHA) loan is it's guaranteed by the government, so the bank doesn't take on any risk. As a result, you can get away with just a 3% downpayment.

Even better, this doesn't even have to be your own money. You can use a gift from a relative, non-profit or government agency. Furthermore, an FHA loan only requires a credit score of 500 or above.

As a result, the bank doesn't impose a mortgage insurance premium. Unfortunately, the FHA does. It's typically 1.5% of the loan value at closing, plus a 0.5% annual renewal premium. Unlike mortgage insurance, it isn't canceled when your equity reaches a certain level.

The VA loan is even better, as it requires zero downpayment and has no mortgage insurance. It does have a one-time fee, but even this can be financed. (Source: VA Factsheet)

Qualifications

To get a conventional loan, you'll need excellent credit. You need a minimum of a 620 credit score, and even then will probably pay a fee if it isn't at least 740. (Source: Bankrate.com, Conventional vs FHA Mortgage

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