What is a conventional Loan?
A Conventional Mortgage is also known as a conforming loan. This type of mortgage follows a set of standards that define the maximum that can be borrowed along with a range of other financial considerations. Conventional mortgages are usually at a lower rate of interest than other types of loans and are typically amortized over 30 years. However you can also find conventional loans with an amortization schedule with as little as a 10 year term.
What are the requirements of Conventional Loan?
The requirements for a Conventional Mortgage are a Minimum credit score of 620 and the ability to pay from income any additional debt and housing costs. Your total debt to income ratio can usually be up to 36% and sometimes greater depending upon individual circumstances and underwriting approvals.
A Conventional Mortgage requires a minimum down payment of 5%. Because a Conventional Mortgage has traditionally required a 20% down payment, there is a requirement of purchasing Private Mortgage Insurance (PMI) on any mortgage financed greater than 80% of the value of the property. The PMI can be eliminated at any time during the life of the mortgage, once your mortgage debt decreases to 80% or less.
There are also a range of options on how you can structure the payment of the PMI. The PMI can be combined into the mortgage rate which is known as Lender Paid Mortgage Insurance (LPMI). The LPMI generally lowers the monthly amount required for the mortgage payment and a separate payment for the borrower paid mortgage insurance (PMI). There is a higher mortgage interest rate that will result with a lower overall payment associated with an LPMI. The LPMI is also “Baked In” to the mortgage so it cannot be cancelled until the loan is paid off or refinanced.
Because of the high cost of housing in most counties in and around the San Francisco Bay Area, Conventional Mortgage limits are $636,150. In most other parts of the country, Conventional Mortgage limits are $417,000.
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