Conventional Mortgages

Conventional Mortgage Topics Covered

• What is a Conventional Mortgage?
• Conventional Mortgage Requirements
• Private Mortgage Insurance (PMI) on a Conventional Mortgage
• Types of Conventional Mortgages
• Conventional Mortgage Advantages
• Conventional Mortgage FAQs

What is a Conventional Mortgage?

A conventional mortgage is one that’s not guaranteed or insured by the federal government. Instead, they are available through private lenders, such as banks, credit unions, and mortgage companies.

Conventional mortgages have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. This gives Charlotte homebuyers a sense of stability that is not present in the case of, say, an adjustable-rate mortgage. Interest rates for conventional loans tend to be lower than rates for FHA loans yet higher than those of VA loans.

Conforming conventional loans must fall within the limits set by Fannie Mae and Freddie Mac. If the loan surpasses that limit, it becomes a jumbo (nonconforming) loan.

Conventional Mortgage Requirements

Documentation Needed to Get a Conventional Mortgage

• Proof of income and assets.
• Employment verification.
• A driver’s license/state ID card.
• A valid social security number.

Other Requirements

• Have a FICO credit score of at least 620 (this number may vary from lender to lender).
• Make a down payment.
• Have a debt-to-income (DTI) ratio of less than 50%. This means that your total monthly debt payments can’t be more than 50% of your pretax income (includes debts that you aren’t actively paying).
• In the case of a conforming conventional loan, your loan must fall within the limits set by Fannie Mae and Freddie Mac.

Down Payment

The requirement for a down payment can vary based on your personal circumstances and the kind of loan or property you’re getting. First-time home buyers in Charlotte have the possibility of acquiring a conventional mortgage with a down payment as low as 3% for qualified buyers.

Private Mortgage Insurance

If you choose to make a down payment of less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI), which protects your lender in case you default on your loan. This is different from FHA loans, where you have to pay an upfront mortgage insurance premium (UFMIP) and an annual MIP.

Your PMI is typically included as part of your monthly mortgage payment, but there are other ways to cover the cost as well. There’s the option to pay it as an upfront fee, or, alternatively, in the form of a slightly higher interest rate.

When you reach 20% equity on your home, you can ask your lender to remove the PMI from your mortgage payments. Once you reach 22% equity, though, the PMI will automatically be removed.

Different Types of Conventional Mortgages

• Conforming – meets loan standards set by Fannie Mae/Freddie Mac. For clarification: the FNMA (Fannie Mae) and the FHLMC (Freddie Mac) are home mortgage companies created by the U.S. Congress. They make the mortgage market more affordable and stable, and they provide liquidity to thousands of loans, banks, and mortgage companies in America.
• Nonconforming – (like a jumbo loan, for example) doesn’t meet the loan standards set by Fannie Mae/Freddie Mac. Oftentimes, jumbo loans require a higher credit score than conforming ones do.
• Fixed Rate – for as long as you have the mortgage, the interest rate will remain the same.
• Adjustable Rate – (also referred to as ARMs) rates change annually, after staying fixed for a set amount of years.
• Renovation – allows you to finance a house while also paying for renovations (good if you’re buying a fixer-upper).

Advantages of Getting a Conventional Loan

• The interest rates tend to be lower for qualified buyers.
• There are more options in terms of down payment, term, and occupancy.
• Overall, these loans can provide the best terms for qualified buyers.

Frequently Asked Questions

What types of homes can I purchase with conventional financing?

Conventional loans allow you to purchase single family homes, condos, investment properties, townhomes, lofts and 2nd vacation homes.

How much can the seller pay towards my closing costs?

Typically the seller can pay 3% of the sales price towards closing. If you put a down payment over 10% they can pay up to 6% towards your closing. This is assuming that your home purchase is for a primary residence. Investment properties are capped at 2% allowable seller paid closing costs.

If my credit score is low, how can I raise it?

Paying your bills on time, reducing your credit balances, and trying to not apply for credit too often are all ways that you can raise your FICO score.

How long does it take to purchase a home?

The normal turn time for a purchase is about 30 days. This 30-day window also assumes you have all your documentation available, provide accurate and verifiable information on your mortgage application and remain diligent in honoring the additional documentation requests that, inevitably, come from underwriting.

Keep in mind that your personal financial situation will probably be closely scrutinized when acquiring a conventional mortgage; this is because loans like these are often riskier for lenders to originate than other types of loans. Due to conventional loans being harder to obtain, they typically aren’t very popular among first-time homebuyers in Charlotte.

If your credit score is in good shape and you can afford to make the required down payment, then a conventional mortgage might be the right choice for you. If not, consider getting a government-insured mortgage instead.