Conventional Mortgages --
Basics, Options, & Comparisons
What is a Conventional Mortgage?
Conventional (also known as "Conforming") is the most common type of mortgage in America, and it's one of those undervalued benefits of living in the country. We take it for granted. People in most other countries generally can't get loans fixed for 15, 20, or 30 years, much less at the very reasonable rates offered in the U.S. on conventional fixed rate mortgages (France is the only other country I'm aware that people can even get a 30-year fixed). More on that later.
Conventional loans are backed by two major agencies (Fannie Mae and Freddie Mac). But instead of delving into definitions, let's jump into practical matters.
We want to consider when conventional financing is typically best, when it's important to compare with alternative programs, and what options you should compare within the program.
When conventional mortgages are hard-to-beat...
Conventional is not limited to the following situations. These are simply situations when Conventional normally works best...
For buyers making a 20% down payment or more.
For borrowers with excellent credit scores (720+) making between 5-15% down payment.
Non-owner occupied investment properties. It has a minimum down payment of 20% for single-family and 25% for multi-unit properties.
Buying for elderly parent, disabled child, or university-bound child. See our Parent-Child Mortgage Program.
Special Conventional Mortgage Programs Worth Considering
HomeStyle Renovation is a fantastic program for financing home repairs, improvements, or renovation with the purchase. It even allows you to purchase properties with repair issues that would make them ineligible for normal types of financing. It's worth comparing with FHA 203k Renovation Mortgages.
The HomeReady program is for people with low-to-moderate income. It has a minimum down payment of 3%. This program allows credit scores down to 620 but has favorable pricing for scores 680 or above.
Special Lender Paid PMI Program. We have special options to pay PMI for you if you're making a down payment of 10-15%.
When alternative programs often beat conventional mortgages...
Conventional is weaker on flexibility.
People with the following descriptions should see the FHA Guide:
Less than 620 credit score (Conventional minimum is 620)
People with 580-719 credit scores who are making less than 10% down payment. (Conventional can go down to 620, but pricing should be compared to FHA)
High debt-to-income ratio (especially over 45%)
Limited credit history or lacking credit scores
Buying a multi-unit (2-4 unit) property as primary residence with a smaller down payment
Some specialized programs can beat Conventional.
People with the following descriptions should see the respective programs:
Buying with under 5% down. (See Low Down Payment Guide)
Buying in rural area (See USDA Home Loans)
Veterans and military people (See VA Home Loans)
Remember, you don't have to figure it out by yourself. We'll be happy to help you compare your relevant options. If you're planning to search for a home within the next three months, start out at Get Started Online.
Conventional loans offer these basic options:
Separate down payment categories of 3%, 5%, 10%, 15%, 20%, and 25% down payment.
(Each category can affect the pricing)
30, 20, 15, 10 year fixed
5/1, 7/1, 10/1 ARMs amortized over 30 years
A wide scale of rate-cost options.
Higher rates match up with lower costs, while lower rates match up with higher costs. The most beneficial option often depends on the length of time you keep the mortgage.
Pre-Approval for Conventional Financing
If you'd like a pre-approval, you do not need to choose a program first. We'd be happy to help you explore. When you're interested in pre-approval, complete the information at Get Started Online.
Conventional Mortgage Rates and What Options to Compare
Some people get overly focused on a narrow question, and they loose sight of the bigger picture. For instance, people sometimes lead with the question, "what's the rate?"
The question obviously brings up important considerations -- although it's asked in a way that misunderstands how mortgages work. We'll come back to that in a moment. But here's what's important...
I realize it's not always wise to trust people who are selling you something. I'm the same way. But you might be surprised by the benefit of finding someone trustworthy and asking questions like, "Can you help me explore and compare a few options that could make sense for me?"
This question could make a huge difference in your ultimate financial outcome -- maybe by $20k, $30k, even $50k, while the previous question could save you a tiny fraction of that at best.
Here's why narrow questions don't work well at this stage...
Rates exist on a scale of rates and costs. Even after you pick the day to lock your rate (since rates are a moving target), program, down payment, and terms, there isn't a single rate. There are multiple rates, each with different costs. Often, it could range from no closing costs to high costs and several increments between. There are usually 3-4 viable sets of rates and costs to compare. We would be happy to help you compare once we know enough to give you accurate information!
When you start off by trying to pin down a single aspect of price (like the rate), lenders have to make many assumptions to answer it. It's nearly impossible to pin them all down on using the same assumptions to answer the question. Some of the differences could be different margins, but much of the difference will likely be different assumptions.
With an important transaction like this, it's worth having someone challenge your assumptions and give you some ideas you would not have thought about yourself. Some of the options may surprise you. For example, check out what I said earlier about avoiding PMI costs with less than 20% down under "Special Conventional Mortgage Programs". Unless someone leads you to these options, you would never know they exist.
Working with a discount mortgage company won't set you up for success. Some people shoot themselves in the foot working with companies lacking a local credibility such as online companies or big banks. When they make offers, listing agents often influence sellers away from those buyers. This is especially true in competitive situations where you might only get one shot.
This most important -- there are really five layers of options that together far more deeply impact your long-term outcomes than the rather limited differences in margins between lenders offering the same programs. Here's the bigger picture...
Five Key Layers
These are five key layers of options --
1. What program (e.g., Conventional, FHA, VA, USDA, ect)
2. What downpayment (5%, 10%, 15%, 20%, 25% are most common for Conventional)
3. What term (30, 20, 15, 10 year fixed or 5/1, 7/1, 10/1 ARM)
4. What option on the rate-cost continuum (usually 3-4 viable options)
5. When and how long to lock (15 day, 30 day, 45 day, 60 day, ect.)
We already discussed where Conventional is strong, where it's weak, and when you'll especially want to compare it externally, to other programs like FHA, VA, USDA, and so on.
If Conventional is for you, we need to zoom in to the next level and pick what options on the Conventional program? That involves selecting options on levels 2 - 5 in the list above, and that part of the list alone involves 204 options (note for nerds: not every downpayment level offers all the terms... the math is correct).
Getting the right combination of these answers will have the biggest long-term impact on your financial picture. These answers could legitimately make the difference of $25,000, $35,000 or even $50,000 over the next ten years for the lives of many people.
We'd like to provide accurate information to you and help you compare the full picture of various options. That means we need to get some information from you so that we can provide personalized details and figures. In order to do that, please complete the information at Get Started Online.
A key comparison tool
We provide a special tool called Total Cost Analysis. Based on your situation, how long you plan to live in the home, your goals, and your financial picture, we'll walk you through this. This tool provides a visual overview that will help to quickly compare the real cost/ savings differences between each option side-by-side...
Here's how you can receive details...
If you're beyond three months away from your home search, get in touch through the contact form below for an informal phone call to star the discussion.
If you're targeting within the next three months for your purchase, go to Get Started Online so we can learn about you as a starting point. That will help us provide accurate information for you.
Let's Work Together!
As you can see, we're very open about the strengths and weaknesses of each program. Our commitment is to help you explore your options to find the best fit. Often, we'll help customers explore options other lenders don't offer or overlook.
On top of that, we'll give you a distinct advantage for getting your offer accepted. Many Realtors refer their clients to us because we have a strong reputation in the local real estate community for being fast and reliable. This makes a difference when the seller's Realtor sees you're working with us.
Our VIP FasTrak program can give you a bona fide head start. This will set you apart from other buyers by showing the seller why they can be confident in you as a buyer, and you'll typically have the option to close faster than 95% of other buyers applying for a mortgage.
Your first step is to complete the information at Get Started Online.
Frequently Asked Questions (FAQ's) about Conventional Loans
Q. What's the minimum down payment for conventional?
A. Traditionally, the minimum down payment is 5%.
You can read about Conventional 5% Down Payment here.
However, two conventional programs provide options for 3% down.
HomeReady provides conventional financing with minimum 3% down for low- to moderate income borrowers.
Conventional 3% down is available for first-time home buyers, but the pricing is worse.
Q. What credit score do you need for conventional?
A. The minimum credit score is 620.
However, if your credit score is under 700, you should compare with FHA because conventional pricing is highly credit score sensitive.
Q. What's the loan amount limit for conventional?
A. The loan limits are called Conforming Loan Limits. For all over Wisconsin, and most places within the United States, the 2018 Conforming Loan Limits are:
$453,100 (one unit home)
$580,150 (two unit home)
$701,250 (three unit home)
$871,450 (four unit home)
Q. What if my loan exceeds the conforming loan limits?
A. If your loan exceeds the Conforming Loan Limits, check out our excellent Jumbo Mortgage Options.
What Else Might Surprise Me about Conventional Mortgages?
Here's something! Read about How to Avoid (or Reduce) PMI on Conventional Mortgages with Under 20% Down.
Also watch the video on the VIP FasTrak program for an important process that makes a difference with giving you an edge over homebuyer competition.
For Further Exploration
I've prepared seven other guides related to conventional financing. If any of the situations described below apply to you, you'll want to check these out!
HomeReady - For low- to moderate- income borrowers. Allows 3% down payment.
HomeStyle - For financing renovations or improvements with your purchase
Conventional 3% Down Payment - Low down payment program
Conventional 5% Down Payment - More competitive low down payment program
Avoid PMI with Conventional Mortgages - Especially for buyers with 10-15% down
Parent-Child Mortgage Program - Learn about buying on behalf of family
Even if you could get a long-term fixed mortgage rate at 0% (obviously you cannot), it would benefit you nothing if the payments were more than you could afford, sucked up all your cash, and bankrupted you. The most important thing is to stick within your means. At the same time it's ideal to buy a home that you could keep for a long time. The longer you keep it, the more of a snowball effect you get with building equity. From a financial perspective, it's important to strike the right balance with those two ideas.
Many individual U.S. citizens and residents can borrow money on fixed rate mortgages at cheaper rates than many governments pay to borrow (not lend) money for just 10 years (i.e., 10-year federal bonds). For example, Brazil currently pays 9.46% annual, Mexico pays 7.56%, Greece pays 4.17%, India pays 7.63%. With all things considered (like current inflation, future inflation risk, default rates, ect.), it's really incredible that Americans can borrow money such low, long-term fixed rates. The bottom line, though, is your price range should be affordable to you. We should find an optimal way to structure your mortgage, well-suited for your situation, that fits best with your financial goals.
Press the "Get Started Online" button below to take the first step.
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