A conventional loan is a mortgage not insured by the government. This means the creditor assumes the risk if the borrower defaults. As a result, conventional loans have stricter eligibility requirements and higher interest rates than government-insured loans, such as FHA loans or VA loans. 

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Conventional loans can be used to purchase a home, refinance an existing mortgage, or purchase a large asset such as a car or boat.

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If you consider taking a conventional loan, it is crucial to understand the vocabulary. It will be helpful in getting the best possible result. This article provides an overview of the common terms and what they denote.

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Types of Conventional Loans

• 30-year fixed-rate mortgage: This is the most common, albeit the maximum is 40 years It has a fixed interest rate for the entire term, which means payments will stay the same for the life of the loan. This is a good option for borrowers who want to have predictable payments and who are comfortable with a longer-term loan. However, note that 30-year mortgages have higher interest rates.
• 15-year fixed-rate mortgage: This loan has a fixed interest rate, which means payments will be higher than 30-year mortgages. This is ideal for borrowers who want to save money on interest and who can afford higher payments. Do note that 15-year mortgages have lower interest rates.
• 5/1 ARM (adjustable-rate mortgage): This loan has a fixed interest rate for the first 5 years, and then it adjusts after that based on market conditions. This is good for borrowers who want to start with a lower interest rate.  ARMs have higher interest rates than fixed-rate mortgages.
• 7/1 ARM: This is similar to a 5/1 ARM, but with a 7-year fixed-rate period. This may be perfect for borrowers who want to lock in a lower interest rate for a longer time. However, increases are possible after the fixed-rate period ends.
• 10/1 ARM: Similar to the other ARMs, but with an extended fixed-rate period. This may be great for borrowers who want to lock in a lower interest rate for longer. Still, there is a possibility the payments increase after the fixed-rate period.

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Terms of Conventional Loans

When considering a conventional loan, evaluate its details. Understanding these terms provides an informed decision if it’s appropriate.

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Loan amount 

The total that you borrow. The loan amount is based on several factors, including your income, credit score, and debt-to-income ratio.

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Interest rate 

The percentage of the loan you pay each year. The interest rate is based on factors such as the amount, the credit score, and the length of the term.

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Down payment 

The down payment is the upfront cost when you take out the loan. The down payment is based on the amount borrowed and the type of loan.

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Loan term 

The loan term is the time to repay the loan. The loan term is based on a number of factors, including income, credit score, and interest rate.

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Points 

Points are fees to lower the interest rate. One point is equal to 1% of the loan.

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Closing costs

Closing costs are fees associated with the closing of the loan. These can include appraisals, title insurance, and origination.

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Prepayment penalty 

A fee that you may be charged if you pay off your loan early.

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Qualifying for a Conventional Loan

• Have a good credit score. A credit score is a number that lenders use to assess your creditworthiness. A good credit score is 700 or higher.
• Be prepared to have a down payment of 5-20%. A down payment is the amount you pay upfront. The larger the down payment, the less you need to borrow and the lower the mortgage payments.
• Afford the mortgage. The payment includes principal, interest, taxes, and insurance (PITI). Make sure you can afford these payments.
• No major debts, such as student loans or credit card debt. Lenders examine the debt-to-income ratio, which is the percentage of income that goes toward debt. A high debt-to-income ratio can make it difficult to qualify for a loan. The average is 43%.
• Be a U.S. citizen or permanent resident. Provide proof of citizenship or permanent residency.

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Conventional loans are less expensive than government-backed loans, such as FHA loans and VA loans. However, they also have stricter requirements.

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If you are uncertain if you qualify, talk to a mortgage lender. They will evaluate your financial situation and help you determine if you are eligible.

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Additional tips to qualify for a conventional loan

• Improve your credit score. This can be done by paying your bills on time, keeping your credit utilization low, and disputing any errors on your credit report.
• Increase your down payment. The larger your down payment, the less you will have to borrow and the lower your monthly mortgage payments will be.
• Reduce your debt. Pay off any high-interest debt, such as credit card debt, before applying for a loan.
• Get pre-approved for a loan. This will give you an idea of how much you can afford to borrow and will make you a more attractive borrower to lenders.

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If you are prepared and meet the requirements, you can qualify for a conventional loan and buy the home of your dreams.

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Pros and Cons of a Conventional Loan

Conventional loans are offered by banks and private lenders. They have several advantages over government-backed loans, including:

• They are more available, so they may be easier to qualify for.
• They have lower interest rates.
• They have more flexible terms, so you might get a longer loan term and lower payments.

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However, conventional loans also have some disadvantages, including:

• They require a down payment of at least 3%, while government-backed loans may allow as little as 0%.
• They have stricter credit requirements.
• They might have higher closing costs.

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Alas, the best loan will depend on your circumstances. If you have good credit and provide the downpayment, a conventional loan may be a fantastic option. 

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Below are additional issues to consider:

• The amount you need to borrow.
• Credit score.
• Income.
• Debt-to-income ratio.
• Your plans for the property.
• Your risk tolerance.

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Conclusion 

Conventional loans are great for borrowers who have good credit and can afford a down payment. They offer competitive interest rates and flexible terms. Alas, compare offers from multiple lenders. Following the above advice will make the process easier to understand. And last but not least, get the best loan for your needs.

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Contact Wesley Mortgage today to learn more about how we can help you achieve your homeownership dreams!

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