Are you looking for a loan that offers more flexibility than an FHA loan? If so, a conventional loan may be the right choice for you. Here are some things to consider if you’re thinking about applying for a conventional loan.

Conventional loans are best for people with good credit who can afford a down payment and don’t mind paying private mortgage insurance (PMI). If you have good credit and can afford a down payment of at least 5%, you may want to consider a conventional loan. You’ll likely get a lower interest rate than with other loan types, and you won’t have to pay for mortgage insurance.

Keep in mind that you’ll still be responsible for property taxes and homeowners insurance. The main downside of a conventional loan is the requirement for PMI if you put less than 20% down. PMI can add hundreds of dollars to your monthly payment, so if you’re tight on budget, a conventional loan might not be the best option. If you’re not sure if a conventional loan is right for you, ask your lender about other loan options.

You might be able to qualify for a government-backed loan, such as an FHA or VA loan, which could save you money on interest rates and PMI.

Credit Score

One of the biggest benefits of a conventional loan is that there is no minimum credit score required. This means that even if your credit score is less than perfect, you may still be able to qualify for a conventional loan.

Down Payment

Another benefit of a conventional loan is that you can put as little as 3% down. This is helpful if you don’t have a lot of money saved up for a down payment.

Loan Limits

There are no loan limits with a conventional loan. This means you can borrow as much money as you need.

Flexible Terms

Conventional loans offer flexible terms, which means you can choose a repayment plan that works best for you. You can choose a shorter term to save on interest or a longer term to lower your monthly payments.

Lower Interest Rates

Because conventional loans are not insured by the government, they typically come with lower interest rates than FHA loans. If you’re looking for a loan that offers more flexibility and better interest rates, a conventional loan may be the right choice for you. Talk to your lender to see if you qualify

The Federal Housing Finance Agency and HUD both increased conforming and FHA loan limits for 2021 due to homebuyers being priced out of the market. The COVID-19 outbreak changed the way we work. Many companies have turned to remote positions for their employees.

Now, remote workers, are not stuck in a particular geographic area. Remote wage earners can live anywhere they want. Many are fleeing high-taxed states to lower-taxed states with affordable housing and cost of living. Mismanaged high-taxed states with incompetent governors like Illinois and New York are losing taxpayers like never before.

Due to the ability to live anywhere remote workers, many city dwellers renting an apartment are fleeing to the suburbs. and/or rural areas with affordable housing and becoming first-time homebuyers sooner than later. Fannie Mae and Freddie Mac are loosening its credit guidelines so many more homebuyers are qualifying for conventional versus government loans.

Benefits of Conventional loans

There are many benefits to taking out a conventional loan. For one, you can avoid paying private mortgage insurance (PMI) if you put down at least 20% of the home’s value as a down payment. Conventional loans also tend to have lower interest rates than other types of loans, such as FHA loans.

Another benefit is that conventional loans typically have shorter repayment terms than other types of loans, so you can get out of debt faster. Finally, if you have good credit, you may be able to qualify for a conventional loan with a low-interest rate and no origination fee.

If you’re thinking about taking out a conventional loan, here are four things to keep in mind:

• You may need a higher credit score to qualify.
• Your interest rate may be higher if you have a lower credit score.
• You’ll need to make a down payment of at least 20% of the home’s value.
• You may have to pay for private mortgage insurance (PMI) if you put down less than 20% of the home’s value.

Keep these things in mind as you compare conventional loans to other types of loans, such as FHA loans. Ultimately, the decision of whether to take out a conventional loan is up to you and should be based on your financial situation and goals.

Surge In Conventional Versus Government Loans

Most mortgage companies are seeing a surge in conventional loans versus FHA loans due to many reasons. FHA loans are originated and funded by private lenders. HUD, the parent of FHA, is the government agency that insures FHA loans originated and funded by private lenders.

However, in order for HUD to partially insure lenders against default and losses by borrowers on FHA loans, lenders need to follow the minimum agency guidelines of HUD. Due to the government guarantee, lenders can offer a 3.5% down payment home purchase FHA loan with credit scores as low as 580 FICO at competitive mortgage rates.

FHA loans are for owner-occupant home financing only. Fannie Mae and Freddie Mac set the agency mortgage guidelines on Conventional loans. Conventional loans are often referred to as conforming loans because they need to conform to Fannie Mae and Freddie Mac Agency Guidelines.

Difference Between Conventional Versus Government Loans

Conventional loans are not backed by any government agency. Then why do conventional loans need to conform to Fannie Mae and/or Freddie Mac Agency Guidelines?

Mortgage bankers and correspondent lenders fund the loans they originate and fund by using their warehouse line of credit. A warehouse line of credit is like a giant revolving line of credit mortgage bankers use to fund the loans they close. Once they fund the loans they close, mortgage bankers and/or correspondent lenders need to sell the loans they funded on the secondary mortgage market. Ultimately, the end buyers of mortgages on the secondary mortgage market are Fannie Mae and/or Freddie Mac.

Smaller correspondent lenders may sell the loans to a larger mortgage banker. The larger mortgage banker can purchase a bunch of mortgages from groups of correspondent lenders and package them up and sell them to Fannie Mae and Freddie Mac. However, Fannie Mae and Freddie Mac will not purchase loans that do not conform to Fannie Mae and/or Freddie Mac Agency Guidelines.
Fannie Mae and Freddie Mac will only purchase conforming loans that meet their agency mortgage guidelines.

The Role Of Fannie Mae And Freddie Mac

Fannie Mae and Freddie Mac are the two mortgage giants that are the biggest buyers of mortgages in the secondary market.
The role of Fannie Mae and Freddie Mac is to provide liquidity in the mortgage markets by purchasing mortgages in the secondary mortgage markets. Due to Fannie Mae and Freddie Mac, lenders can sell the mortgages they fund and pay their warehouse lines of credit. By being able to pay their lines of credit, lenders can repeat making mortgage loans to consumers at competitive rates.
Conventional loans are becoming increasingly popular. More and more borrowers are opting to choose conventional versus FHA loans. There are mortgage guidelines that borrowers meet on conventional loans but not FHA loans.

• For example, FHA loans do not accept Income-Based Repayment (IBR Payments on student loans.
• However, Fannie Mae and Freddie Mac Agency Guidelines allow IBR Payments on student loans.

This also holds true on zero-payment IBR payments.
HUD requires mortgage underwriters to use 1.0% of the outstanding student loan balance on the outstanding student loan balance if the monthly payment is not an amortized monthly payment on an extended payment plan.

Down Payment Requirements On Conventional Versus Government Loans

Conventional loans allow a 3% down payment on a home purchase for first-time homebuyers. A first-time homebuyer is a buyer who has not had an interest in homeownership in the past five years. Borrowers who had a prior mortgage included in bankruptcy can qualify for a conventional loan four years from the discharge date of bankruptcy. The finalization of the date of the housing event (foreclosure, deed in lieu of foreclosure, short sale) does not matter.

The mortgage cannot be reaffirmed. However, HUD will require a three-year waiting period from the finalization date of the housing event if there was a mortgage included in bankruptcy and the discharge date does not matter. Fannie Mae and Freddie Mac have lightened their agency guidelines when it comes to prior bad credit. You do not have to pay outstanding collections and/or charged-off accounts on primary home conventional loans just like FHA loans. Mortgage guidelines on outstanding collections and charged-off accounts are different on investment properties. Conventional loans are for owner-occupants, second homes, and investment properties.

Skyrocketing Home Prices And The Mortgage Markets