Conventional Loans
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.
Example
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.
Sellers Concessions
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 Refinance Loans
A conventional refinance is simply a non-government backed loan used to refinance or replace an existing mortgage. Like conventional loans, a conventional refinance offers fantastic rates, lower costs, and greater flexibility than other programs.
There are several advantages that Conventional Refinance loans can provide homeowners especially if they have a good amount of equity. If the refinance is under 80% loan to value there will be no monthly mortgage insurance and the homeowner may qualify for an appraisal waiver.
You can use a conventional refinance loan to:
- Refinance an existing FHA loan to cancel the mortgage insurance
- Refinance another conventional loan to a lower rate
- Refinance an adjustable-rate mortgage (ARM) into a fixed rate.
- Consolidate a first and second mortgage.
- Take cash out of your home’s equity.
A conventional refinance typically requires around 5% of equity. If your LTV is less than 20%, you’ll be paying a higher interest rate as well as monthly mortgage insurance. Michigan Mortgage Solutions is here to provide more information about conventional refinancing, including complete eligibility requirements. Contact us at 248-963-1894 or click the Refinance Button below to get your low rate Conventional Refinance Today!
