White bread if you will. Conventional lending may or may not be the best loan for any particular individual, but it is the loan that most folks aspire to. Here are the characteristics of a conventional loan:
-Credit Score of 680 or above (the score can be lower-I will go into that in a minute)
-Down payment requirement of 5%
-In addition to the 5% down, many times the loan requires two months of mortgage payments in assets
Lower mortgage insurance requirements than FHA, and no upfront mortgage insurance requirement as opposed to the government loans, all of which have an upfront mortgage insurance or a funding fee that rolls into the loan.
-No specific credit line requirements in most cases (i.e. number of credit account open and in use)
-Monthly mortgage insurance falls off the loan automatically at a 78% equity position-normally about 11 years into the loan. FHA and USDA monthly mortgage insurance are in place for the lifetime of the loan.
Interestingly enough, interest rates on conventional financing are higher than the government counterparts. (Unless someone is interested in an adjustable rate mortgage. I haven't had too many hands in the air to take on one of those lately.) But if payments are compared-the conventional with the higher rate will beat out the FHA with the monthly mortgage insurance most of the time. VA mortgage payments often beat out a conventional as VA has no monthly mortgage insurance.
Let's look at an example:
Let's assume a mortgage loan of $150,000
The conventional loan has an interest rate of 4.5%, the FHA and VA loans have a rate of 3.875%-here are the payments plus Mortgage insurance:
Conventional with 5% down - $841.16
FHA with 3.5% down $886.45
VA-no monthly MI $720.52
Tell me again why conventional lending is better for a veteran? This is what many of my competitors who are either unfamiliar with or do not have the VA product are telling vets.
In any event, most people who are not eligible for VA would prefer a conventional mortgage. So the question is-what if one's credit scores are below 680?
One solution is putting 20% down. It is the mortgage insurance companies that dictate what credit score they will insure if less than 20% is put down. Some will go down to 660, but the interest rate will increase accordingly. At 640 even with 20% down the rate will be significantly higher too-but having a lower credit score will not necessarily bump a borrower out of conventional financing. They will just pay more for the loan. Mortgage lending is all about risk, remember. Lenders want a reasonable assurance that they will get their money back and as credit scores decrease the risk of foreclosure goes up-hence the much higher mortgage insurance on FHA as FHA lends money with lower score requirements.
Down payment requirements is another reason why some borrowers turn to a government loan rather than conventional. FHA only requires 3.5% down and the money can be a gift from a family member. USDA and VA have no down payment requirements. Typically, conventional lending requires 5% down and the 5% has to be the borrower's own money. There are exceptions-we have a lender that will allow the full 5% to be a gift from a family member. However the credit score requirement in that situation goes up to 720. Once again risk is involved-statistics bear out that the less money a borrower has in a transaction the likelihood of foreclosure increases. And I think it can be mentioned that many folks who need low or no down payments may not have the cash reserves to weather an economic downturn.
For the most part, conventional loans are a bit easier to process and close. But don't think for a minute that a conventional loan is the answer to a house that does not meet minimum condition standards. Mortgage lenders learned a lot in 2008 when the housing market crashed. One of the things they learned was that they were sitting on a lot of foreclosed homes that were condition disasters because there had been no condition standards for conventional lending previous to that time. So appraiser are the lender's eyes and will note any substandard conditions and a lender can and will refuse to loan on those properties.
In days to come, in preparation for the spring buying season I will talk about the government loans as well-the good the bad and the ugly. All in all I try to match the right loan to the right borrower so that as many people as possible can achieve the dream of home ownership.
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