A conventional mortgage is reserved for today’s “best” borrowers, or those traditional lending institutions view as less of a risk to default on a loan. It is worth noting, however, that conventional mortgages exist to help their originators as much as the borrowers, if not more so. You see, conventional mortgages are inherently risky for banks to approve, so it only makes sense that they’d only accept the best applicants, but what’s that mean for everyone else? It is about time you learn the ins and outs of a conventional mortgage, and exactly what it means for you.
Conventional mortgages are typically reserved for those borrowers with more than encouraging financial profiles. They are best suited for prospective borrowers with no blemishes on their credit reports and scores of at least 680. In other words, conventional mortgages are intended to service the least risky population of borrowers, and for good reason: conventional mortgages actually pose the most risk to lenders, as they aren’t backed by the government. Unlike their Federal Housing Administration (FHA) loan counterparts, conventional mortgages aren’t insured by the government, so lenders offering conventional mortgages are less inclined to take unnecessary risks.
In addition to being reserved for those borrowers that represent the least risk, conventional mortgages will typically require a down payment somewhere in the neighborhood of three to 20% depending on the product being offered. It is worth noting, however, that those who don’t put down at least 20% will be required to pay what those in the business call private mortgage insurance (PMI). In attempt to make their investment even less risky, PMI will help offset the risk of so-called “safe” borrowers from defaulting on their loans.
To be perfectly clear, a conventional mortgage is a risky move for most lenders because their “products” are not insured by the government. However, the risk of offering a loan that isn’t backed by the government is offset by strict underwriting; namely, higher credit scores, larger down payments and private mortgage insurance. Therefore, if you hope to qualify for a conventional mortgage, you should expect to be required to meet relatively strict requirements.
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As I already alluded to, a conventional mortgage is a home loan that’s not insured by the government. Whereas FHA loans are insured by the federal government, conventional mortgages are not. More specifically, “the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments,” according to Zillow. Conventional mortgages, on the other hand, are not awarded the same luxury. Banks offering conventional mortgages are going to take more precautions when lending to borrowers since their loans aren’t insured.
A conventional mortgage is essentially a way for banks to offset the risk associated with offering loans that aren’t backed by the government. “Conventional mortgages present the most risk for lenders since they are not insured by the federal government,” according to Investopedia. As a result, conventional mortgages are reserved for today’s best borrowers; those least likely to default on their mortgages.
While a conventional mortgage calculator can certainly be useful to those with all the required information, those without the supplemental data will find their calculations falling short. In other words, a good conventional mortgage calculator will account for everything from private mortgage insurance, property taxes, homeowners insurance, HOA dues, and other costs. Only once you have every variable will a mortgage calculation be helpful. That said, The Mortgage Reports has a conventional mortgage calculator that will account for everything you need to know now, and in the future.
Due, in large part, to their “riskier” nature, conventional mortgages typically coincide with a larger down payment. It is not uncommon for the down payment on a conventional mortgage to rest somewhere between three and 20%
It is worth noting, however, that the downpayment for a conventional mortgage comes with a significant caveat: whereas most people put down anywhere between three and 20%, those that don’t manage to put down at least 20% will be required to pay private mortgage insurance. That’s because the less a borrower puts down, the more of a risk they pose to the lender. Therefore, PMI is levied on anyone that doesn’t put down enough money at the start of a mortgage. The private mortgage insurance, as you may have already guessed, is intended to lessen the risk of borrowers that may default. Borrowers required to pay private mortgage insurance will continue to do so until their loan-to-value ratio reaches 80%.
Conventional loan rates are far from universal, and tend to vary depending on three important factors: the amount put down, the loan originator and the market’s current conditions. According to Bankrate, however, “the average 30-year fixed mortgage rate is 4.70%, up from 4.64% last week. 15-year fixed mortgage rates increased to 4.16% from 4.07% this week.”
A conventional mortgage is a great option for borrowers with a pristine credit history, but there’s a lot more to these traditional loans than most people realize. Traditional loans, most notably, represent a risk to lenders, but they target the best borrowers to offset said risks. Perhaps even more importantly, those that qualify for them stand to receive great terms.