According to the Home Buyer and Seller Generational Trends report, more than half of all home buyers — 59% to be exact — chose conventional mortgages when they needed home loans. Many of those homeowners will refinance their conventional loans at some point, as well. So, exactly what is a conventional loan and what does it mean to refinance one? Here’s an explanation of each and how they can work for you.
What are conventional home loans?
A conventional home loan is one that isn’t backed by a government agency, such as the Federal Housing Administration (FHA), Department of Veteran Affairs (VA), or the Farmers Home Administration (FmHA). Conventional loans meet the income and down payment requirements that are set by Fannie Mae and Freddie Mac, and can be 15, 20, or 30 years long. Borrowers who put down at least 20% of the home’s purchase price don’t have to pay for mortgage insurance, while a smaller down payment or a government-backed loan does require it.
Are you eligible for a conventional home loan?
Conventional loans can be a bigger risk for lenders, so they tend to have tougher requirements. Borrowers should have good financial standing, a credit score of at least 620 to 640, and a decent-sized down payment. However, if you have a higher credit score, you might be able to make a lower down payment. You may even be able to get a better rate if you have a higher credit score.
What are the benefits of conventional home loans?
If you meet the requirements for a conventional mortgage, making a larger down payment will mean smaller monthly payments. Private mortgage insurance premiums may be lower on a conventional loan and you can even cancel the insurance once the principal balance drops to 78% of the home’s value. (Remember that a down payment of 20% will mean that you don’t need mortgage insurance to begin with.)
What does it mean to refinance a conventional home loan?
Refinancing a conventional loan means that you will replace your existing loan with a new one. People tend to refinance if they want a lower monthly payment, to get a lower interest rate, to get a fixed-rate loan, to get cash from home equity, to pay down debt, to reduce the length of the loan, or to remove private mortgage insurance.
This basic overview of conventional loans and refinancing should allow you to feel a bit more confident going into any meeting with a lender or when looking at available homes on the market. To learn more about obtaining a home loan or refinancing your current loan, please contact us today.