Conventional Loans

Most simply stated, a conventional loan means a homebuyer’s mortgage is not backed or insured by a government agency such as the Federal Housing Administration (FHA) or Veterans Administration (VA). Buyers can use a conventional mortgage to purchase a one- to four-unit home, a condominium, modular or manufactured home as a primary, secondary or investment property.

The down payment of a conventional purchase loan is generally higher than that of a government-insured loan, such as an FHA loan, which is 3.5%. Conventional borrowers generally must pay between 5% to 20% percent of a home’s purchase price for a down payment. On a refinance, a conventional loan can have a loan-to-value (LTV) ratio as high as 95% with the addition of private mortgage insurance (PMI) or lender paid mortgage insurance (LPMI) .

On a conventional loan, we will consider a buyer’s debt-to-income (DTI) ratio, which is determined by calculating the projected housing costs and actual recurring monthly expenses. A buyer’s home expenses include: monthly loan payment applied toward principal and interest, property taxes, mortgage and homeowners insurance in addition to all monthly expenditures, must not exceed 43% of the buyer’s income.

A FICO credit score of 640 and higher increases a borrower’s rate of approval and may reduce the loan’s interest rate.

Borrowers who have filed a Chapter 7 bankruptcy case can apply for a conventional mortgage after four years from discharge date, and those who have filed a Chapter 13 may apply two years after the re-establishment of an active credit profile.

The current market and the borrower’s FICO credit score influence the interest rate he’ll receive on a conventional loan. Conventional loan programs at a fixed rate, where the interest rate stays consistently the same throughout the term of the loan, or as an ARM, an adjustable-rate mortgage, where interest rates initiate at a below-market rate and change on a designated schedule, which ranges from monthly to annually or longer.

Conforming conventional loans have a maximum loan limit set by Fannie Mae at the county level. In the case of non-conforming loans, banks generally set the limit at 80 to 90 percent of the home’s appraised value.

As always please contact an BOE Mortgage loan officer to discuss the conventional loan options as well as any other loan program options to see which program fits your specific loan the best.

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