Conventional Mortgage Loans
What is a Conventional Loan?
A Conventional loan is simply a loan that meets the requirements set by Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase mortgages from lenders and sell them to investors.
There are different types of Conventional loans, conforming and non-conforming. A common type of non-conforming loan is a jumbo loan. This type of loan exceeds the conforming loan limit.
Conventional Loan Requirements
The down payment required varies by your particular situation. For example first time homebuyers can qualify for 3% down, but the general requirement is a 5% minimum investment. This amount varies by the loan purpose and occupancy type as well. Investment properties as well as multi-unit properties have additional down payment requirements.
Private Mortgage Insurance
Private mortgage insurance (PMI) is required on all conventional loans when you put down less than 20%. PMI protects your mortgage investors in case you default on your loan. The cost for PMI varies based on your loan type, your credit score and the size of your down payment.
PMI is usually paid as part of your monthly mortgage payment, but there are other ways to cover the cost as well. Some buyers pay it as an upfront fee included in their closing costs. Others pay it in the form of a slightly higher interest rate. Choosing how to pay for PMI is a matter of running the numbers to figure out which option is the cheapest for you.
The nice thing about PMI is that it won’t be part of your loan forever – that is, you won’t have to refinance to get rid of it. When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments.
If you reach 20% equity as a result of your home increasing in value, you can contact your lender for a new appraisal so they can use the new value to recalculate your PMI requirement. Once you reach 22% equity in the home, your lender will automatically remove PMI from your loan.