Conventional Loans

Conventional Loans – Not Just a Vanilla Loan Anymore

With all the changes in the mortgage industry over the last few years, many feel there are not as many different loan products available as there once was. It is true that many of the minimal documentations loans have all but disappeared (stated income, stated asset, no documentation), however there are many options with in the loan types still available that give borrowers multiple options regarding terms and requirements for newly originated loans. At Mortgage Solutions of Georgia, we take the time to fully understand these options and help our clients compete the loan that best fits their situation. It used to be thought that conventional loans were mainly used if the client was putting 20% and wanted a 30 year fixed rate. The “vanilla” loan. This is not the case. With private mortgage insurance companies coming back into the market, conventional loans are becoming a very competitive loan product for qualified clients weather they are buying or refinancing their home loan. Higher LTV (loan-to-value) options, lender paid mortgage insurance, and special refinance programs are making conventional loans an alternative to home financing that should not be ignored.

Conventional Loans Background Information

At one point, everyone in the United States had conventional loans because they were the only mortgage loans available and they were all issued by local lenders such as banks, savings and loans, and credit unions. These private lenders kept and serviced these loans in their own portfolio until they were either paid in full or foreclosed on.

In the late 1930’s, a secondary market was created which allowed these local lenders to sell their loans, getting the full payment much more quickly and increasing their ability to originate more loans. Then, the organizations that purchased the loans owned the agreement and collected payments from the borrower. Today it is very common practice for lenders to sell their loans on the secondary market.

Different Types of Conventional Loans

“Conforming” Loans

Conforming conventional loans are loans that meet terms and conditions set by Fannie Mae and Freddie Mac. This means they fall within the maximum loan limits set forth for the area in which it is originated and meet minimal standards for documentation. In the state of Georgia, the maximum loan limit for conventional loans is $417,000. This maximum loan limit is normally higher than the limit set forth for FHA loans.

“Non-Conforming” Loans

Nonconforming loans don’t meet Fannie Mae or Freddie Mac qualifications due to loan size or other criteria, but are still considered conventional. An example of a conventional loan that does not meet Fannie Mae or Freddie Mac guidelines is a jumbo loan. A jumbo loan is a loan with a dollar value above the maximum loan amount established by Fannie or Freddie for a certain area. Jumbo loans normally have a higher interest rate as compared to conforming conventional loans.

Mortgage Insurance for Conventional Loans

Mortgage insurance or PMI (private mortgage insurance), is insurance that most lenders require for loans that have a loan to value of over 80%. This is insurance against possible loss of investment if there was a foreclosure while the loan is still over 80% LTV. Based on the availability of PMI, lenders are able to offer conventional loans without requiring clients to invest 20% into the transaction. This gives clients the ability and freedom to use funds in different areas such as investing in other assets, improvements to the home, or college funds for children.

Mortgage insurance sometimes carries the stigma of being a dirty concept or something that should be avoided at all costs. However, depending on a clients qualifications, PMI premiums can be very favorable and can be a cost effective was to achieve home ownership while retaining assets. There are also lender paid mortgage insurance programs that may allow you to avoid a monthly mortgage insurance premium by building the cost into the rate. Or split mortgage insurance programs that allow you to reduce the normal monthly premium by paying a set charge up front at the loan closing.

Benefits of using a Conventional Loan to Purchase a Home

  • Can invest as little as 5%
  • Can have lower monthly MI charges than FHA loans
  • Can take advantage of LPMI or split MI options
  • Can buy property for uses other than primary residence-investment and secondary
  • Can have seller pay up to 3% of closing costs
  • Can purchase homes above standard loan limits-jumbo loans

Benefits of using a Conventional Loan to Refinance a Home

  • Can be used to refinance homes outside of primary residences-investment and secondary
  • Can refinance with “cash out” options to pay debts other than existing mortgage
  • May qualify for “special” refinance programs-HARP, refi plus-related only to conventional mortgages
  • Can refinance at higher LTV’s with monthly MI less than FHA

As you can see, conventional loans have more options to them than people have been assuming. With terms on 30 year to 10 year loans and even a variety of “ARM” loans available, they are a product that should always be considered when trying to find the best home loan for your needs. Let Mortgage Solutions of Georgia guide you through wide range of choices on conventional loans and help you find the right loan for your situation today!