A Conventional Home Loan is often the preference of friends I have met or family that are potential home buyers, at first, Conventional home loan programs have more stringent guidelines than FHA Mortgage loan products which is our nation’s most popular loan program. My current friends and family that I have assisted always ask about conventional home loan programs. What is the difference to a buyer ? To answer this question accurately its best you understand the difference. FHA does not loan money, The Federal Housing Administration is a federal government entity through HUD, Housing and Urban Development and they do not make home mortgage loans, their primary responsibility is to insure/guarantee a loan in the event the borrower defaults. Conventional loans are not guaranteed or insured by any government agency. Compared to well known FHA, VA, USDA loan products that are guaranteed by the government in the event of foreclosure. Conventional loans follow the same guidelines (Fannie Mae, Fredde Mac) but interest rates on them can vary lower or higher, depending on a variety of qualifiers. Conventional Loan products are available from 3% to 20% down or even more, however to obtain a 3% down conventional loan you must have excellent FICO scores and excellent credit history to begin with. Excellent credit scores 720 to 740 or even higher for little down and the best mortgage pricing. Conventional loans are made through private lenders and are not insured by any government agency. This does not mean they are not any less safe than a government insured loan, in fact all loans must meet FNMA or FDMC (Fannie May or Freddie Mac) guidelines. One of the reasons FHA Loan products are popular is not only are they less stringent to qualify for but the lender has a guarantee from a government agency taking away a large part of the risk involved. For the borrower with FICO score less than 620, obtaining conventional is not normally the best route. For one thing, most lenders would not even discuss conventional home loan products and if you would obtain one for some odd the reason the interest rate would exceed FHA even with their higher MIP (Mortgage Insurance Premium). Some people believe Conventional Home loan products do not have mortgage insurance but this could not be farther from the truth. Any loan with a LTV (Loan to Value) 80 % or more will be required to have mortgage insurance obtained through private mortgage insurance known as PMI.
Conventional Home Loan Mortgages are a good product, however the majority of first time homebuyers have limited resources for down payment money. FHA loans are available for 3.5% down payment with a minimum FICO Credit score of 580 according to minimum FHA guidelines. However, a borrower with less than 620 and sometimes 640 will not qualify for a Conventional Home Loan. Conventional Home Loan products are excellent for borrowers with better than average credit and have financial resources to apply more down payment money. Conventional home loan products are great for second homes, FHA will allow lenders to loan money for second homes and vacation homes or non-owner occupied property. Therefore convention home loan products are the best avenue for this type of financing. Another advantage of conventional home loan products is private mortgage insurance (PMI ) as mentioned above every borrow that does not have the resources to apply at least 20% down payment will be required to have mortgage insurance for at least 2 years or until they have reached 78% loan to value. This is huge advantage over FHA because PMI for conventional mortgages is considerably cheaper and 2nd, Mortgage Insurance for FHA loans are for the life of the loan. A borrower wth a conventional loan may drop the PMI after 2 years if they can show their home now has at least 20% equity or otherwise 80% loan to value. How does this happen? One of the great and maybe the best thing about home ownership is that a home is an investment. In fact a home purchase will probably be the single largest investment most people make in a lifetime and even with the Real Estate meltdown of 2008 homeowners have seen their home grow in value, referred to as home appreciation. Besides the stability a home provides for a family, the pride of having your own house and having your own castle, your home is an investment.
Conventional Home Loan products are better suited for jumbo loans, larger loans. HUD’s responsibility is to encourage safe, affordable housing to Americans but it does limit the dollar amount of a loan they will insure through an approved FHA mortgage lender. Maximum loan amount for FHA is $271,500, but some areas like Miami, Palm Beach, Broward County Florida have higher loan limits of $345,000. Conventional and VA loans cap at $417,000. Many areas of California is capped at $625,000. Google FHA loan limits and go to the HUD website for current loan limits. The Larry Stepp Team at Gustan Cho Associates is available 7 days a week, holidays and weekends for our resource and assistance.
Larry Stepp 407-922-4755 LarryS.HomesNetwork@gmail.com