Many people have heard about or used conventional loans to buy homes and know a thing or two about them. But how much do you really know about them? Also, is what you know about conventional loans true? Apart from the basic facts about conventional financing, many Americans don’t know much about conventional loans, while others are misinformed about them. A recent El Poder Es Ahora (The Power Is Now) East Coast Homebuyer TownHall show hosted by Adriana Montes highlighted the top 10 most important things you need to know about conventional loans, as discussed below.
- Conventional loans require a low down payment.
There’s a belief that goes around that only government loans provide low down payment programs, which is not true. Conventional loans also require a minimum of 3% down payment for a single-unit property, 15% for a two-unit property, and 25% for three and four-unit property.
Moreover, conventional loans can also save you money and provide a little bit more flexibility in some instances. On the other hand, conventional loans from Fannie Mae and Freddie Mac underwritten through Fannie Mae Freeman guidelines are set to receive loan limits, according to an announcement on the FHFA website. For example, with a conventional loan in Florida, the maximum you can borrow for a single-family home is $548,250.
- Conventional loans require private mortgage insurance.
Like the government-backed loans such as FHA, conventional loans where you pay a down payment of below 20% also require private mortgage insurance. However, a conventional loan where you’re putting a down payment of 20% or more doesn’t require private mortgage insurance. Private mortgage insurance is very important to the lender, regardless of whether it’s a government-backed or a conventional loan. It protects the lender in case the borrower defaults on the loan.
- You can avoid mortgage insurance on a conventional loan with less than 20% down.
The best way to avoid having mortgage insurance is to put down 20% or more. But what if you can’t afford to put down 20%? If you don’t have the money, you can still avoid mortgage insurance by putting down as low as 5% and get a lender to carry a second mortgage for the difference, in this case, 15%. The combined loan to value maybe 95%, but what the lender has outstanding to you is only 80%. If your loan to value is 80% or above, you can qualify to get a second mortgage from a lender.
- The underwriting guidelines for conventional loans can be more challenging.
It’s never easy when it comes to qualifying for a conventional loan. First, you need to have traceable funds to put for a down payment. Your money must come from an acceptable source before any bank accepts it. Also, to qualify for a conventional loan, you must have a minimum FICO score of 620, which also depends on the loan amount. The higher the loan amount, the higher the required FICO score. Moreover, there’s a minimum and maximum debt ratio required. For a conventional loan with a FICO score as low as 620, the maximum debt ratio should be 50% of the gross income.
You also need to have no mortgage late to qualify for a conventional loan. Also, you need to have cash reserves in the bank amount to at least principal interest for a single-family unit property. Additionally, you need to have no bankruptcies, no foreclosures, and short-sales in the last four years and sometimes seven years, depending on the situation.
- A conventional loan is also a jumbo loan.
A jumbo loan is any loan above the new conventional conforming limit, which is currently at $548,250. A jumbo, which also means something large, comes with greater reserve requirements and higher FICO score requirements. Conventional loans are jumbo loans because all their requirements are higher and stricter.
- Interest rates are not higher on conventional loans.
Many people think the Interest rates for conventional loans are higher. This is incorrect. Interest loans are not necessarily higher for conventional loans. Instead, interest rates for conventional loans are determined by the amount of down payment. The larger the down payment, the lower the interest rate, while the larger the loan amount, the higher the down payment required.
- Are conventional loans better than FHA loans?
Conventional loans aren’t necessarily better than FHA loans, while FHA loans aren’t necessarily better than conventional loans; it all depends on one’s situation while everybody’s situation is different. For example, lower FICO score and higher debt ratio requirements are associated with government loans, which is not the case for conventional loans. As much as FHA loans are easy to qualify, someone could argue that they can be assumable while conventional loans are not. So, one could choose a conventional loan over an FHA loan, knowing that interest rates aren’t going to be this low ten years from now, and this will make the home more attractive than a home with an assumable mortgage.
- Why do sellers dislike FHA loans?
For the last 39 years that I’ve been in the real estate industry, I’ve realized that sellers dislike FHA loans because agents dislike them. Most sellers don’t know much about financing since most are doing it for the first time; they only know what real estate agents tell them. Experts say that only misinformed sellers dislike government loans because misinformed agents, who have never received any formal training in loans, advise them.
- The seller can pay up to 6% in closing costs.
Like the government loans, there’s no prohibition for the seller to pay for some of the closing costs. The seller can cover up to 6% in closing costs for conventional loans.
Conventional loans also do have a lender premium that can be used as a credit towards your closing cost, especially if you have great FICO scores. In other words, the lender also can help in paying your closing cost by raising your interest rates.
- Is private mortgage insurance deductible?
Yes. Private mortgage insurance is deductible on some people, depending on your income. The more money you make, the less that can be written off. If you’re still paying mortgage insurance premiums, they can be written-off from 2020 backward to as far as 2016. However, there are guidelines that determine how much of the insurance can be written-off. There’s a 10% deduction for each $1000 of one’s gross income if you make more than $100,000 per year, and $50,000 for those married and filing separately. However, I’d advise that you consult with your CPA or your tax attorney to get more details on the matter.
You can watch the whole show on our YouTube channel here.
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The Power Is Now continues to keep you updated with the latest news in the real estate market as we strive for advocacy of homeownership, wealth building, and financial literacy for low to moderate-income and minority communities. In this regard, we have a team of professional realtors— VIP Agents stationed nationwide to help you with anything you need in attaining your homeownership dreams. You can get in touch with the VIP Agents at https://thepowerisnow.com/vipagent/. If you can’t find an agent from your area, you can contact me directly for a referral. Also, ensure you stay updated with any developing real estate market news by regularly checking our blog page at https://thepowerisnow.com/blog/. You can also set up an appointment to speak directly to me at https://calendly.com/ericfrazier.
Disclaimer: The views and opinions of Eric Lawrence Frazier are his own and do not necessarily represent First Bank or any organization affiliated with Eric Lawrence Frazier, or the Power Is Now Media Inc. First Bank is an Equal Credit Opportunity Lender. Eric Lawrence Frazier, MBA, is also a Vice President and Mortgage Advisor with First Bank. NMLS#461807 and a California Licensed Real Estate Broker DRE# 01143482. Email: Eric.firstname.lastname@example.org. Ph: 714- 475-8629.
Eric Lawrence Frazier MBA
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