I advise first-time homebuyers to meet with a mortgage broker before deciding on a loan because mortgage brokers offer a wide range of products, including old, tired and boring conventional loans. A bank can also make a conventional loan, but generally, the range of products of a bank is limited and particular to this bank alone. Considering that a mortgage broker can negotiate loans from a number of banks.
After the collapse of mortgages in 2007, many types of exotic loans disappeared and conventional loans regained a prominent place in real estate markets.
Conventional loans retain the reputation of being a safe type of loan, and there are a variety of conventional loans to choose from.
The main difference between a conventional loan and other types of mortgages is that a conventional loan is not made by a government entity or provided by a government entity. This is what we call a non-GSE loan. A non-governmental entity.
The types of government loans are FHA and VA loans. An FHA loan is provided by the government and a VA loan is supported by the government. The down payment requirements are also different. The minimum down payment for an FHA loan is 3.5 percent. For a VA loan, the minimum deposit is zero.
Conventional loans amortized
Homebuyers can purchase a conventional loan from a bank, savings and loans, a credit union or even a mortgage broker who finances their own loans or brokers. Two important factors are the loan term and the loan-to-value ratio:
- LTV 97% with a common term of 30 years (or 20, 15 or 10)
- 95% LTV with a common term of 30 years (or 20, 15 or 10)
- 90% LTV with a common term of 30 years (or 20, 15 or 10)
- 85% LTV with a common term of 30 years (or 20, 15 or 10)
- LTV at 80% with a common term of 30 years (or 20, 15 or 10)
- LTV can be less than 80%.
It can be anything that is comfortable for a borrower. If the LTV ratio is above 80%, lenders require that borrowers pay for private mortgage insurance *. The duration of the loan can be longer or shorter, depending on the qualifications of the borrower. For example, a borrower could qualify for a 40-year term, which would significantly reduce payments. A 20-year term loan would increase payments. Here are some examples of how payments may change depending on the length of the loan:
- A loan of $ 200,000 to 6% payable over 20 years would result in a payment of $ 1,432.86 per month.
- A loan of $ 200,000 to 6% payable over 30 years would result in a payment of $ 1,199.10 per month.
- A loan of $ 200,000 to 6% payable over 40 years would result in a payment of $ 1,100.43 per month.
A fully amortized Conventional purchase loans is a mortgage in which the same payment of principal and interest is made each month from the beginning of the loan to the end of the loan. The last payment pays the loan in full. There is no lump sum payment.
The compliant loan limits are $ 417,000. A minimum FICO score for a good interest rate is higher than those required for an FHA loan. Loan limits in excess of $ 417,000 are considered agency loans, and some are jumbo loans and interest rates are higher.
* Some conventional loan products allow the lender to pay private mortgage insurance.
Adjustable conventional loans
A conventional floating rate loan means that the loan is adjustable, it can fluctuate. Some loans are set for a certain period of time and then they become variable rate loans. Here are three popular types of adjustable conventional loans:
- 3/1 ARM. This loan is set for 3 years, then it starts to adjust for the remaining 27 years.
- 5/1 ARM. This loan is set for 5 years, then it starts to adjust for the remaining 25 years.
- 7/1 ARM. This loan is set for 7 years, then it starts to adjust for the remaining 23 years.
Characteristics of an adjustable conventional loan
Many borrowers avoid a conventional variable rate loan and prefer to stick to a classic amortized loan.
For borrowers whose income may increase, a variable rate mortgage could be just the ticket to help with the first years of payments.
- The initial interest rate is lower than the rate of a fixed rate loan.
- There is a maximum amount that the loan can adjust over the term of the loan, called the capitalization rate.
- The interest rate is determined by adding a margin rate to the index rate.
- Adjustment periods can be monthly, semi-annual or annual, among others.