A conventional loan is a type of mortgage that is not made, insured, or guaranteed by the federal government. Nonetheless, a dominant number of conventional loans conform to the guidelines of Freddie Mac and Fannie Mae- government sponsored enterprises.
A conforming conventional loan generally has a loan limit of $424,100 or less for a single family home. It has established guidelines for borrower credit scores, minimum down payments, and income requirements. For example a down payment of 3 to 20 percent is required for a conventional loan. However, a conventional loan can also be non-conforming. A non-conforming loan is a mortgage that fails to meet standard performance guidelines for funding.
We offer clients conventional fixed-rate loans and adjustable-rate loan.
As the name suggests, the interest rate remains fixed and does not fluctuate. This means your monthly payments remain the same throughout your loan term. A conventional fixed rate mortgage comes in different loan terms of 10, 15, 20, 25 and 30 years. This loan type is a good choice if you plan to live in their home for years.
With an adjustable rate mortgage, the interest rate is subject to change. It doesn’t remain fixed. It can move up or down depending on the market movement- specified index/benchmark which impacts your monthly payments.
However, during the introductory period, the interest rate and payments with ARM loans remain unchanged. The introductory period can be of 3 years, 5 or 7 years. ARM starts with an initial interest rate lower than the traditional fixed-rate loan. But once the introductory period ends and expires, the interest rate is then adjusted according to the prevailing market interest rate and the adjustment cap limit. The rate is adjusted usually after every 6 months. ARM loans are suitable for those who plan to sell their homes and move somewhere else over time.
Though interest rate and loan term are important factors to consider when choosing a mortgage type, another factor that plays a vital role and can influence selection decision and is often overlooked by homebuyers is LTV (Loan to Value) ratio. It is a key factor in your application and may vary depending on the property type you are thinking of purchasing.
For more information on conventional loans or to find out which loan type is best for you, get in touch with us today.