When looking for favorable mortgage options, you can never go wrong with conventional loans.
They account for many home purchases and refinances and are guaranteed through the private sector—different types of mortgage lenders from banks to online lenders.
If you are a first-time home buyer in Michigan, the following paragraphs will tell you all about conventional loans, things you need to secure to acquire one, and the advantages of choosing this mortgage for your new home.
Types of Conventional Loans
Depending on your eligibility, there are three main types of conventional loans to choose from: Conforming loans, Jumbo loans, and Non-qualified mortgages.
Conforming loans are mortgages that fall within the Federal Housing Finance Agency’s limits.
The government-sponsored enterprise, Fannie Mae and Freddie Mac, can buy them from lenders through the secondary mortgage market. These loans which conform to the guidelines of Fannie and Freddie make them a marketable security allowing for them to be bought and sold between lenders, banks and Fannie and Freddie themselves. Conforming loans thereby gives lenders the ability to sell these loans and get back their capital to continue making new mortgages accordingly.
Jumbo loans, on the other hand, can’t be sold to Fannie Mae or Freddie Mac. Also known as non-conforming loans, jumbo loans are mortgages that exceed conforming maximum loan limits. Jumbo loans are available to well-qualified borrowers who need larger loan amounts than the loan size limits offered in conventional loans.
Non-qualified mortgages or non-QM loans are a good option for borrowers who can afford a mortgage but cannot meet the credit or Debt To Income ratio requirements. Non-QM loans can’t be sold to Fannie Mae or Freddie Mac. Some of these are FHA, VA, USDA and other private lender loans.
The Requirements You Need to Meet for a Conventional Loan
Conventional loans tend to have stricter requirements than government-backed loans like FHA loans, VA loans, and USDA loans. You will need to secure a good credit score, balanced debt-to-income ratio, down payment, private mortgage insurance, and approved loan size.
The following are important details to note for each requirement:
- Credit score: The minimum credit score requirement to qualify for a conventional loan is 620. However, mortgage lenders favor borrowers with a 740 score or higher-offering them the lowest interest rates and the best deals.
- Debt-to-income ratio: Most lenders will not want the debt-to-income ( your total debts/total gross income) ratio to exceed 43 percent.
- Down payment: You need to prepare for a down payment if you plan to get a conventional loan. If you’re planning to get a primary residence, you can make a down payment of as small as 3 or 5 percent since many fixed-rate conventional loans allow it.
- Private mortgage insurance: If you put down less than 20% of the sale price of the property percent, you’re required to pay private mortgage insurance to help protect the lender in case you default.
- Loan size: The Federal Housing Finance Agency sets limits to conforming conventional loans each year. These limits vary depending on where the property is located. However, rates in the majority of the U.S. in 2021 is at $548,250.
The Value of Conventional Loans
There are many advantages to getting a conventional loan. One of its biggest appeals is the cancellable mortgage insurance. After paying 20 percent equity in the home, you can cancel your private mortgage insurance.
Conventional loans are also available for second homes and investment properties. This is widely different from the stricter requirement of government-backed mortgage programs, which usually obligates borrowers to live in the home as a primary residence.
Because conventional loan rates are based on economic and market conditions and your lender’s overhead, the rate you get will be determined by the current economic climate and your credit score. If you have good credit, you will most likely get the best rates. Conventional loans also have flexible repayment timelines, where lenders allow borrowers to choose from a wider range of time frames for loan terms.
Your Mortgage Experts in Michigan
Getting a conventional mortgage is one of the most versatile loans you can find for your new
home. The best thing for you to do is get in touch with a company that offers full-service mortgage solutions so that you can explore and select the most suitable option.
MMS Mortgage Services offers mortgage services in Michigan and beyond. We are a licensed mortgage lender and can help you with your mortgage needs. Please call (248) 788-0800 or toll free at (800) 945-4506 then press 2, to schedule your free consultation.