Conventional loans, also known as conforming loans are the most popular type of mortgage and are backed by Fannie Mae and Freddie Mac, two government sponsored enterprises that support this type of financing. These loans are most attractive for applicants who want to purchase outside of FHA loan limits. Currently, the loan limit in Texas is $647,200, raised from $548,250 last year.
In other parts of the country that are considered high cost, such as California or Alaska, the conforming loan limits are higher. Conventional loans are structured and priced using a risk-based model. What this means is that the better overall strength of the file, the better pricing it will receive. The components that make up a loan profile are down payment percentage, credit history, and debt to income ratio.
Conventional loans will generally allow up to 45% debt to income ratio, however, some circumstances will allow the percentage to be higher. Applicants for conventional loans must not have filed bankruptcy in the past four years and may not have foreclosed on a property within the past seven years. If you do have some of these circumstances, the FHA loan has more leniency with these requirements.
Conventional loans have mortgage insurance attached for down payments that are less than 20%. Mortgage insurance comes in several different options including paying monthly, paying in one lump sum, or a combination of both. Based on what is most important to the applicant, whether it is monthly payment, or cash to close, there is always a sensible option for every situation.
Like the conventional loan, mortgage insurance itself is risk based, so the better your profile, the better the Conventional loans also allow for the applicant to choose whether they want to escrow their taxes and insurance in some cases. Instead of including their monthly tax and insurance payment with the cost of the mortgage every month, borrowers would be able to pay each entity in lump sums at tax time and on a designated insurance premium schedule.
This is attractive to applicants because it reduces the amount of cash to close that a borrower could need, or it is beneficial if the borrower has an income structure that coincides with the payments, such as a year-end bonus. Within the Conventional arena, there are additional specialty products that can be offered.
The Fannie Mae Homestyle Loan, which you can read about in the Renovation tab, can be included within a conventional program. These loans allow you to include the cost of a home renovation or repairs within the loan amount with minimal out of pocket cost.
We also offer a wide array of construction loans to fit your conventional loan needs. Whether you already own the land you want to build one, or you have a lot in mind, we can help secure financing for this type of project. This loan product allows tear down projects, adding additional square footage or a stories, and full finish out of an entire home.
Additional specialty products include Fannie Mae Home Ready and Freddie Mac Home Possible products which allow for lower mortgage insurance premiums based on location of the property.
In low to moderate income tracts determined by the federal government and underserved communities specifically delegated, Home Ready and Home Possible mortgages allow for lower down payment and reduced mortgage insurance percentages, flexible fund sources, and options for cosigners who won’t reside in the property. Borrowers are not required to be a first time home buyers to qualify for these products. These products can only be used for primary residences and a home buyer counseling class may be required for approval, but can be easily obtained through an online course.
Conventional loans can be combined with second mortgages in order to avoid mortgage insurance altogether. A conventional mortgage at 80% of the purchase price is created, and a second mortgage to make up for the difference between what is left and the down payment follows that first lien. This completely prevents the requirement of mortgage insurance, although the second lien may have a slightly higher interest rate.
The borrower will actually pay two separate mortgage payments each month and apply the payments to the first and second liens. Often times, this combination will create an overall lower monthly payment, even though the rate on the second mortgage is higher than the first. This is because the mortgage insurance requirement is completely eliminated in this scenario.
The approval process is very similar to other loans and the requirements in terms of documentation are quite standard. Borrowers will be required to provide general information for an application, such as income and asset documentation. Clients may be required to provide all or some of the following items: paycheck stubs, W2 forms, tax returns, bank statements, retirement accounts, drivers licenses, and documentation pertaining to property that is already owned, if applicable.
An appraisal may be required in order to confirm that your property is worth the contracted value and that you are purchasing for. Additionally, your loan will go through underwriter in which a final approval is given based on your financial credentials and the collateral. You will close your loan on the contracted date at a title company, mutually agreed upon by the buyer and/or owner. Once your paperwork is signed, the money will be wired from the lender to the title company and you will receive your keys! This is known as funding.
All in all, conventional loans are the most popular, standard loan products used for mortgage financing today. They offer a wide array of options and flexibility in order to meet the needs of borrowers across the country. As always, it is most important to work with a knowledgeable lender who can help you choose the right loan product and address both long and short term financial goals. The best lenders will require most of your documentation up front in order to ensure a smooth and stress-free process with no surprises.