Understanding Conventional Mortgages

Understanding Conventional Mortgages

Fairway Mortgage
Fairway Mortgage
Published on January 22, 2023
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Understanding Conventional Mortgages

A conventional mortgage is a type of home loan that is not guaranteed or insured by the federal government. Instead, these loans are issued by private financial institutions, such as banks and mortgage companies. One of the defining characteristics of a conventional mortgage is that it is a “conforming” loan, meaning that it meets the requirements set forth by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

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How Fannie Mae and Freddie Mac Affect Conventional Mortgages

Fannie Mae and Freddie Mac are GSEs that play a crucial role in the conventional mortgage market. They purchase mortgages from lenders, and then package them into securities that are sold to investors. This process helps to free up funds for lenders, allowing them to originate more loans to qualified borrowers.

In order for a mortgage to be considered “conforming,” it must meet certain criteria set forth by Fannie Mae and Freddie Mac. These criteria include things like maximum loan limits, credit score requirements, and debt-to-income ratios. By adhering to these guidelines, lenders can ensure that the loans they originate will be eligible for purchase by the GSEs.

Advantages of a Conventional Mortgage

One of the main advantages of a conventional mortgage is that they often come with lower interest rates than other types of home loans, such as FHA and VA loans. This is because conventional mortgages are not backed by the government, and therefore carry less risk for the lender.

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Another advantage is that conventional mortgages are available in a wide range of loan terms, including 10, 15, 20, and 30-year options. This allows borrowers to choose a repayment period that best fits their financial situation and goals.

How to Qualify for a Conventional Mortgage

In order to qualify for a conventional mortgage, borrowers typically need to meet certain credit and income requirements. This can include a minimum credit score, a debt-to-income ratio below a certain threshold, and a stable income and employment history.

It’s also important to note that conventional mortgages typically require a larger down payment than government-backed loans. While FHA loans only require a minimum down payment of 3.5%, conventional mortgages typically require a down payment of at least 5%.

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The Importance of Credit Score and Debt-to-Income Ratio

When it comes to qualifying for a conventional mortgage, one of the most important factors that lenders consider is your credit score. This three-digit number, which ranges from 300-850, is a measure of your creditworthiness and is based on information in your credit report. The higher your credit score, the better your chances of getting approved for a conventional mortgage and securing a lower interest rate.

Another important factor that lenders consider is your debt-to-income (DTI) ratio. This is a calculation that compares your monthly debt payments to your gross monthly income. Lenders typically want to see a DTI ratio of 43% or less, as this indicates that you have a manageable level of debt and a stable income.

The Role of Mortgage Insurance

One of the key differences between conventional mortgages and government-backed loans is that conventional mortgages typically require private mortgage insurance (PMI) if you make a down payment of less than 20%. This insurance, which is paid for by the borrower, helps to protect the lender in the event that you default on your loan.

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However, it’s important to note that there are ways to avoid paying PMI. One option is to make a down payment of at least 20%, which eliminates the need for PMI. Another option is to look into lender-paid mortgage insurance (LPMI), which is a type of mortgage insurance that is paid for by the lender

The Bottom Line

A conventional mortgage is a type of home loan that is not guaranteed or insured by the government. Instead, these loans are issued by private financial institutions and must meet certain requirements set forth by Fannie Mae and Freddie Mac. By understanding the basics of conventional mortgages and how they differ from other types of home loans, borrowers can make an informed decision when it comes to financing their home purchase.

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Additional Resources

If you’re considering a conventional mortgage, it’s a good idea to work with a trusted lender who can help you understand the process and guide you through the application process. Fairway Mortgage is an excellent resource for those looking for more information about conventional mortgages. With their Fairway Advantage Pre Approval, you can lock your initial interest rate for up to 90 days on 30-year conventional, FHA and VA fixed-rate purchase loan products [3].

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