Informational - Volunteer Home Mortgage

6 Things To Know About Conventional Loans

What is a Conventional Loan?

We’ve all been at the stage of our adolescence where we watched TV shows and movies and thought to ourselves, “That’s the house I want one day.”

We genuinely believed that those “dream” houses on the screen were affordable for the average person because, well, the average person in the show lives there.

Before we knew it, we had grown up, paid our dues in life, and soon realized that it was time to buy a house.

You quickly became aware of down payment requirements that you wish someone would have told you about years ago, credit scores that have more control over your life than you realized and something called PMI that everyone hates but always talks about.

How did those average people on TV afford such incredible houses?

We want you to get the dream home that you’ve had your heart set on for all these years. Although it may seem unattainable now, with our help at Volunteer Home Mortgage we will work with you every step of the way to get you there.

First things first though, we need to understand all of your options as well as which one is right for you.

After we get through the groundwork, the young grasshopper will become the master and you’ll be ready to call your Realtor to go find your dream house...after we get you qualified, of course!

In this post, we’ll talk about the 6 things you need to know about conventional loans.

1. Down Payment

“Down payment” can sound like a scary term, but a huge benefit to this requirement is a lower monthly payment. The higher amount of your down payment, the lower your monthly payment will be, however, the lower your down payment, the higher your monthly payment will be.

A first-time home buyer can qualify for a conventional loan and there’s even a benefit for them with the opportunity to put as low as 3% down. Just know that your payment will most likely be higher vs someone who put down 5% or 10%.

For someone not a first-time home buyer, the down payment minimum is 5%, which is still very low.

Some restrictions:

If the home is not a single-family home, which is more than one unit, the down payment requirement could be 15% or more.
Rental properties or a second home will require a minimum of 10% down
Jumbo loans require 20%-40% down
Adjustable rates require 5% down

Try a mortgage calculator if you want an idea of what you can afford as your monthly payment. The worst thing you could do when purchasing a home is blindly taking out a loan just because you “qualify” for a certain amount. The monthly payment is the most important part of taking out a loan.

Rental or investment properties require 20% down. Second homes 10%

Here’s a loan calculator that we trust.

2. Interest Rates

The beauty of the conventional loan is that it is so versatile.

A 30-year term with a fixed interest rate is typical for a conventional loan, but that is not your only option.

15-year loans at a fixed rate are one option, as well as 15 or 30-year loans with an adjustable rate.

If you can take on a higher payment, a 15-year loan may be the right option for you and you’ll most likely receive a lower interest rate.

Conventional loan rates change daily
You don’t have control over adjustable rates and your mortgage could be higher or lower at different times of the year

Each loan varies based on personal situations. You won’t get an accurate idea of what your payment would be until applying for the loan. When you apply with Volunteer Home Mortgage, we show you what your interest rate will be as well as your monthly payment so you know exactly what type of home to look for.

3. Credit Score

Credit scores are two things in life, your best friend or your worst enemy.

The higher your score, the better your interest rate will be. This will translate into what your monthly payment will be. Typically, a score of 620 or more is preferred for a conventional loan.

The sweet spot = over 740

One rule of thumb, you’ll never regret working on your credit, no matter how old you are.

4. PMI

As a result of conventional loans not having government backing like their counterparts, the FHA loan and the VA loan, the lender offering the conventional loan is sticking their neck out for you. Meaning, this type of loan is not insured and if the borrower defaults on their loan, the lender will not have any protection and will ultimately be responsible financially.

This leaves the lender exposed and vulnerable, to soften that potential blow, the lender can choose to add PMI to your mortgage payment if you put down less than 20%, you’ll be required to pay private mortgage insurance (PMI).

The amount of your PMI will ultimately be decided based on the type of conventional loan you get, your credit score, and the amount of your down payment.

Helpful Tip:

Don’t want to have PMI added to your monthly payment? No problem. Buyers can oftentimes pay an upfront cost to cover the PMI or some buyers pay it by slightly increasing their interest rate.

PMI is an important part of the loan process and you’ll need a lender you can trust to walk you through all the options and figure out which one is best for you.

Don’t lose hope!

PMI is not forever. You heard that right.

And you will not need to refinance your house to make the PMI go away.

Once you achieve 20% equity in your home, you can request that your PMI be removed from your payments. So make sure you are paying attention to your loan as time goes on. Once the home acquires 22% equity, your PMI will be removed automatically. But who wants to wait until 22%? Not us.

Stay alert and don’t be afraid to ask once you reach 20%.

Loophole:

Pay attention to the value of your home. If you reach 20% equity in the home because of an increase in value (for whatever reason), be sure to contact your lender to get an appraisal and recalculate your PMI requirement.

Here’s a great reference for what could increase the value of your home. Hint It isn’t just adding upgrades to your house!

5. How is it Different?

So, do conventional loans stack up against the VA loan or FHA loan?

The VA loan is limited to veterans, active-duty military members, and their surviving spouses.

Pros of the VA loan:

A down payment is not required
No PMI requirement regardless of how much your down payment is

Cons to VA loan:

Cannot use it for a second home, you need to either pay off that loan or sell the current home to use the VA loan again
Have an allotted loan amount based on the location of the home

The FHA loan has its pros and cons as well.

Pros of the FHA loan:

Lower credit score requirement than a conventional loan
Minimum down payment of 3.5%, even with a low credit score

Con to the FHA:

PMI is required for FHA loans if the down payment is less than 10% and will last for the entirety of the loan, regardless of how much equity is in the home. Whereas, for conventional loans, PMI drops off after reaching 22% equity in the home

6. Different Types?

To add to the complexity of mortgage loans, there are different types of conventional loans.

Conforming Conventional loans

If a lender would like to sell a loan to a government-sponsored enterprise like Fannie Mae or Freddie Mac, they have to meet certain requirements.

Why would a lender want to sell a loan? This frees up lenders’ funds which allows them to bring in more qualified buyers and put them into homes.

Nonconforming Conventional loans

Simply put, nonconforming is the opposite of conforming loans. These do not meet Fannie Mae’s or Freddie Mac’s guidelines.

Jumbo loans are an example of this. These loans exceed conforming loan limits, which are typically $548,250 in most counties across the country.

Fixed-rate Conventional loans

As we mentioned earlier in this post, there are fixed-rate loans and are typically 30-year mortgages, due to the more affordable monthly payment. This interest will stay the same for as long as you have the mortgage.

Adjustable-rate Conventional loans

An adjustable-rate mortgage, also known as ARM, are rate that will fluctuate over time. After an initial fixed-rate period ranging from three-10 years, the ARM rates usually adjust annually.

Low-down-payment Conventional loans

There are opportunities to pay a lower down payment but the lower you go, the more risky it is, and will ultimately take you longer to build equity in your home vs someone who makes a larger down payment, as well as additional interest.

You could put down as little as ZERO for your down payment, but your debt-to-income ratio plays a significant role in this as well as your credit. This is very risky, so it is not always advised.

Conventional Renovation loans

Chip and Joanna Gaines aren’t the only ones who can fix up a house and do it well. Oftentimes it can be hard for buyers to find the house they want in the budget they have.

Luckily, certain loans assist with buying a fixer-upper if the market is high or when inventory is low for good-quality homes.

The CHOICERenovation loan and HomeStyle loan are two great options that allow the right buyers to purchase a home, make it their own, AND increase the value of the neighborhood.

Summary

If you qualify for the credit score requirement, with a downpayment of at least 3-5%, and have a lower debt-to-income ratio, the conventional loan may be the best option for you.

Volunteer Home Mortgage can help you decide if this is the best fit for your situation, give us a call!

Jerri Ingram

6 Things To Know About Conventional Loans Read More »

What is a FHA Loan?

Informational, Loan Type

The thought of buying a home can be scary. All the paperwork, getting your credit in order, building up your savings for a down payment, getting approved, or having the chance of getting denied for a loan. It’s all so… BIG.

But, did you know that your down payment doesn’t need to be so big? Did you know that even if you already own a house, you can use the FHA loan?

MYTH-BUSTER:

FHA doesn’t stand for “first-time home buyer” but actually, “Federal Housing Administration!”

There has been a major misconception about FHA loans over the years with buyers thinking that only first-time buyers can utilize it. This couldn’t be further from the truth!

Why is an FHA ideal?

More lenient on your credit than a conventional loan
5% down payment (This can be a gift) with a credit score of 580 or higher (nerdwallet.com)
You are eligible even if you had a foreclosure 3 years ago. Conventional loans require you to wait 7 years
Possibility for lower mortgage insurance payments than conventional loans.
Typically have lower interest rates, leading to lower mortgage payment
In this area, the seller will typically help pay closing costs which is ideal for buyers who do not have large savings built up

So, Who Can Qualify for an FHA Loan?

Individuals with lower credit scores. Life happens, right? Sometimes credit scores take a dive when you least expect it or at the worst times. Luckily, an FHA loan allows for as low as 500. Just be aware that the closer you are to 500, the higher the down payment will need to be.

Anyone who had a foreclosure over 3 years ago. This may seem like a big number if you had a foreclosure, but conventional loans actually require you to wait 7 years before qualifying for a loan if you had a foreclosure.

Someone with a steady income. To qualify, the individual needs to have had a steady income over the past two years, a valid social security number and you need to lawfully live in the United States.

What can I buy?

Single-family homes, modular homes, and manufactured homes!

The Down Payment

Why is it important that your down payment can be gifted to you? It might seem miniscule that the minimum 3.5% down payment can be a gift, but this is prohibited with other loans.

Buyers with low savings built up who still would like to or need to buy a house can have family members gift them the money to cover the down payment.

For areas where the renters market is much less affordable than the prices of homes for sale, this is ideal. As rent goes up, it becomes increasingly hard for younger or low-income families to have a good quality of life.

Having the chance to be gifted your down payment AND have a mortgage more affordable than renting a home that is not your own...how can you lose?

What's the catch?

Some things just sound too good to be true, right? So what’s the catch with the FHA loan? One aspect that someone could see as a downside to the FHA loan is that the property has to be your primary residence.

Meaning, you cannot use the loan to purchase a rental property that would bring you income. This is why you are not able to purchase multi-family properties since they are typically used for rental income.

FHA borrowers are also required to pay FHA mortgage insurance. This insurance is very much like Private Mortgage Insurance (PMI) which is what lenders require with other types of mortgages when a buyer has a down payment of less than 20%.

The FHA mortgage insurance works in two different ways:

Wrapped up in your monthly payment
Pay the amount upfront as part of your closing costs

The monthly cost included in your monthly payment can vary based on the amount that you put down, the length of your loan (typically 30 years), and the original loan-to-value ratio. This could be .45% of the loan or as much as .85% of the loan.

If you pay the amount upfront, the cost is 1.75% of the total loan amount

These extra costs are how FHA protects itself. Those premiums are put into a fund which is used to pay lenders in case of any defaults. These premiums increased after the FHA experienced a major loss in 2013.

Due to this loss, the FHA also made a change to how long their mortgage insurance remains on the loan payment. If the borrower puts down at least 10%, they will only have their mortgage insurance on the loan for 11 years. Whereas, if a borrower puts down less than 10%, like the minimum 3.5%, it will remain for the entire life of the loan.

If the borrower eventually wants to take off that mortgage insurance, they have the option to refinance when they are qualified to do so.

In Summary

As with any loan, the pros and cons depend on what stage of life you’re in.

Volunteer Home Mortgage prides itself on our expertise in looking out for our clients. We always want to guide our clients in the right direction and make sure that our clients are fully informed and know what they are getting into.

FHA loans are a fantastic option for the right borrower, just like any other kind of loan! If you feel as though the FHA loan sounds like something you want to learn more about, we’d love to help you.

Jerri Ingram

What is a FHA Loan? Read More »

What is a USDA Loan?

Loan Type, Informational

As more people flock to suburbs and major cities, the rural communities in the nation are often left with a dwindling economy and lower job opportunity. Because of this, families in rural areas typically have a lower income vs a family living in a popular suburb with a booming economy.

The USDA loan is designed to help lower-income families in rural communities, because of it’s zero down payment requirement.

The USDA loans are issued through the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.

USDA Loan Differences

The USDA loan program consists of three different kinds of loans.

Home improvement loans and grants

Much like the conventional renovation loan, the USDA also offers an option for those who would like to or need to update/repair their home.

This program can also combine a loan and a grant for increased amounts.

This is perfect for those in an older community where the standard of housing is very low and their options are bleak whether they stayed in their current home or left.

Loan Guarantees

This is when the USDA guarantees a mortgage issued by your lender and needs to be a local lender. This will ensure that you get low mortgage interest rates and can do so even if you don’t have a down payment.

That guarantee acts as a form of insurance protecting USDA lenders, so they’re able to offer below-market interest rates and zero-down home loans.

Direct Loans

Designed for low and very low-income applicants, direct loans will vary by region, and income requirements will differ.

Thanks to Uncle Sam, subsidies are the reason that interest rates for these loans can be as low as 1%!

How Do I Qualify?

Like other loans, the USDA loan income limits will vary based on your location. Each country is different and sets its limitations. This will also depend on the size of your household.

Income

The applicant is required to have a steady income, but you cannot make more than 15% of the median income in your county.

Home as the primary residence

The property for this loan needs to be your primary residence and not a rental home or a second home.

feels-good-to-be-home-its-good-to-be-back

Credit Score

An applicant needs to have at least a 640 credit score to qualify, although this can vary per lender at their discretion.

Debt

Applicants cannot surpass 41% of a debt-to-income ratio. This is due to trusting an ability to pay back the loan, if your debt is too high compared to your income it will look like you will not be able to pay your mortgage.

Where Do I Need to Live?

You’ll need to reside in what is categorized as a rural area and is known as a town with less than 20,000 residents.

Important to know

PMI is included in USDA loans

You can find a more in-depth dive into what PMI is here if you don’t have a solid understanding of it.

If you know what it is, we know you just took a deep breath of disappointment. But don’t worry, mortgage insurance is much lower than if you were to have an FHA loan or conventional loan.

The buyer will need to front 1% of the entire loan as an insurance cost, and will then have an added monthly payment of that mortgage insurance wrapped up into the mortgage payment.

This is where it gets good.

FHA loans typically have a .85% annual fee for mortgage insurance, and conventional loans even up to as high as 1% and sometimes higher.

However, the USDA loan only has a .35% annual fee, based upon the remaining principal balance on the mortgage.

This just means that your mortgage insurance payment which is included in your monthly payment will be much lower than it would be otherwise.

Mortgage rates are lower with USDA loans

USDA interest rates are among the lowest of any other kind of loan. Typically, they can even be an entire 1% lower than your more common loans.

The better your credit score, the lower your rate, BUT the USDA loan is meant to help those with lower incomes and those with scores as low as 640. This helps so much for those who are struggling financially and need a home!

If you meet the other requirements but your credit score just isn’t quite at 640, please call us. We’d love to sit down and help you come up with a plan to bring your credit score up!

Summary

Living in East Tennessee can be tricky for some. Although Maryville is not a town of less than 60,000 people, we know many towns in the region are!

It’s important to us that we serve those who need these kinds of loans the most and many people do not know they exist.

We’re thankful our nation has programs like this to cater to small-town folk who are the backbone of this great country.

Jerri Ingram

What is a USDA Loan? Read More »