Conventional Mortgage as a Low-Risk Financing Option

A conventional mortgage is a loan offered to borrowers who can make a down payment of at least 20 percent. Generally, such loans meet the criteria established by Fannie Mae and Freddie Mac.

Advantages of Conventional Loans

Borrowers benefit from a lower interest rate compared to other loans, and the reason is that banks take less risk when the down payment is at least 20 percent. Again, because of the amount of the down payment, borrowers make lower monthly payments, which are more affordable. The alternative is to buy a mortgage insurance policy, which increases the cost of borrowing. As an added advantage, borrowers have a greater equity in their house, which reduces the risk of foreclosure. Financial institutions also offer flexible payment options and are more willing to negotiate and waive different fees. Finally, banks offer larger loan amounts to borrowers who are able to make a large down payment. They feature fixed interest rates, which is a good choice for people who have fixed, stable income. Many people prefer to make payments that don’t change with interest rate fluctuations. This makes budgeting easier. In some cases, financial institutions offer loans with a variable interest rate.

Downsides of Conventional Mortgages

People with a seasonal or fluctuating income may benefit from a variable-rate loan. The initial interest rate is often lower than that on a fixed-rate loan, which can save borrowers a lot of money. Another downside of conventional loans is that financial institutions require a hefty down payment. This means that people on a tight budget may not qualify. Moreover, borrowers with a poor credit score are often offered a high interest rate. Lenders are also free to determine the origination fees. The closing costs include application, survey, and appraisal fees, as well as recording fees, taxes, title service costs, home warranties, and other expenses. All these increase the cost of borrowing.

Lender’s Requirements

In addition to a hefty down payment, applicants should have a credit score of at least 620 to qualify. Some financial institutions accept credit scores of 580 and higher. As a rule, an excellent score translates into an attractive interest rate. The applicant’s payment history and debt-to-income ratio are also taken into account. Financial institutions obtain the borrower’s report to assess his willingness and ability to pay off debt. Borrowers with late and missed payments, delinquencies, judgments, consumer proposals, and bankruptcies are unlikely candidates. Payments that are late for 30 days or more disqualify applicants for a conventional loan. Financial institutions look at the payments made during the last 12 months. The borrower’s debt-to-income ratio is another important factor. A high debt-to-income ratio shows to banks that the applicant is a risky borrower. This means that he has multiple credit cards and loan balances. Borrowers with a ratio of over 30 percent are unlikely to have their application approved.

Other Considerations

The loan limit varies depending on the type of property. The limit for a single-family home is $417,000. Then, the limit can increase for areas in which property prices are higher.

For condominiums, financial institutions require a down payment of at least 20 percent because mortgage insurance is usually not available. Note that mortgages which don’t meet these criteria are called non-conforming or jumbo loans.

Other Types of Mortgages

Financial institutions offer a large selection of loans, including variable-rate, fixed-rate, endowment, interest-only, and others. Some loans such as interest-only mortgages are riskier than others.

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