A conventional loan is basically a loan that is not insured by the federal government. This means that if you aren’t able to put a least 20% down, you will be required to pay for Private Mortgage Insurance or PMI for short. PMI is a fee that is paid by the borrower to insure the lenders risk of that borrower defaulting on the loan.
Conventional Loans also offer the best financing options including a low rate and lower PMI. This can provide you with a lower monthly payment as well as the least amount of resistance during the mortgage process.
Down Payment Requirements
The minimum down payment for a Conventional Loan is 3%. However, qualifying for a 3% down payment is quite restrictive from a credit and debt ratio perspective. This is why most conventional borrowers put down 5% or more.
Conventional loans also have strict policies when it comes to getting a gift for your down payment. These policies state that the borrower must contribute at least 5% of their own funds towards the down payment unless the gift will be for down payment of 20% or greater.
Mortgage Insurance Requirements
Conventional loans require that you pay PMI on a monthly basis if your down payment is less than 20% of the purchase price. The PMI monthly payment will be determined by the amount you put down, the term of your mortgage and your credit score. It’s calculated based on a small percentage of your loan amount, usually between 0.27 and 1.1%, divided by twelve.
You’re buying a $150,000 home with a 5%, or $7,500 down payment. This leaves us with a loan amount of $142,500. We’ll assume the PMI is 0.67% which would give us the following PMI Calculation;
PMI = $142,500 x 0.67% = $954.75 / 12 = $79.56 per month
You won’t know your PMI percentage until you get pre-approved. As stated earlier, it will be based on your credit score, your loan to value, and the term of your mortgage. The monthly PMI payments automatically cancel when you pay your loan down to 78% of the original loan amount.
Credit Score Requirements
The minimum credit score for a Conventional Loan is 660 but can sometimes go lower with compensating factors such as a high down payment, large cash reserves, or a low debt ratio.
Debt Ratio Requirements
The maximum debt ratio for a Conventional Loan is 45% with no exceptions.
The maximum sales concession for a Conventional Loan is 3% with less than 10% down and 6% if you put more than 10% down.
Conventional Cash Out Refinance loan
If you’re looking to pull some cash out of your home we have some great Cash-Out Refinance options. Depending on your equity position, we have programs that can lend up to 80% of your home’s value. If you’re looking to consolidate debt, remodel your home, or need cash for another reason, we have the program for you. Let Michigan Mortgage Solutions earn your business by providing you with a “5 Star” Cash Out refinance experience.
A cash out refinance mortgage loan is a great option if you have accrued some equity in your home. If you owe $150,000 on a home that is worth $250,000, you could refinance the amount you owe and take up to $50,000 against the equity in your home. This cash out can be used in a variety of ways. These options include consolidating debts, funding and completing a remodeling project, or even working capital to invest.
How high are the fees for a cash out refinance?
Cash Out refinance fees really depend on which lender you choose. At Michigan Mortgage Solutions we don’t charge any upfront fees or any other junk fees like processing or underwriting fees.
How fast do you need the money?
When you take out a home equity loan, it takes less time to see your money. Often, it only takes 5 days to close. Cash out refinance mortgage loans can take a lot longer, so if you need the money immediately, it probably isn’t the best option.
Protect yourself from scam artists.
There are lenders that practice something called loan flipping. They convince you to refinance your house, taking out a bit of equity for a project or two. A few months later they approach you to refinance again, convincing you to take out more cash from the equity in your house. Their scheme is to keep having you refinance, tacking on large fees and possibly increasing your interest rate until you are so far in debt that you end up losing your house. This particular scam has been played against many elderly homeowners with devastating results.
Taking cash against the equity in your house can be a wise move, but always compare taking a cash out refinance mortgage loan against the option of taking out a home equity loan and choose the plan that is best for you.