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What are the benefits of a conventional home loan in Papillion NE?
If you’re looking for a home in Papillion NE, conventional financing might be the program for you. Conventional home loans are considered traditional financing and are for buyers with great credit, good debt ratios, and a down payment. There are a few things to consider before going with a conventional loan.
What are the requirements for a conventional home loan in Papillion NE?
Conventional home loans is the “meat and potatoes” financing. It is the basic loan program. Here are a few of the requirements to qualify for a conventional home loan.
Credit requirements
Conventional loans are a bit more particular about credit than FHA or VA. The minimum credit score we will allow is 640, but if you are below 680 it is a good idea to see if FHA is a better fit. Conventional loan rates increase as based on credit score. A perfect credit score is considered 740 and it drops in 20 point “tiers”. So if you are below 740 but above 720 you have excellent credit. If you have less than a 720 credit score but above 700 you have good credit. Above 700 conventional financing is usually the best option. Once the score is below 700 we will start comparing FHA options because the rate and mortgage insurance, if any, will increase. This brings us to our next requirement.
Mortgage insurance requirements
Mortgage insurance is required on conventional home loans with less than 20% down. Unlike FHA loans, conventional loan’s mortgage insurance changes based on credit, debt ratios, and down payment. The higher the down payment the lower the mortgage insurance percentage. Conventional mortgage insurance is also higher the lower credit score. If your total debt to income is higher than 45% there is also a small increase in mortgage insurance. The only way to really know exactly what you will pay in mortgage insurance is to run an application, but generally it is .25% to .75% of the loan amount per year.
Conventional debt to income ratios
Conventional loans are a bit more strict on debt to income ratios than FHA and VA. We will take your gross monthly income and compare it to your new house payment and total debts appearing on your credit report. Just like rate and mortgage insurance, the maximum debt ratio depends on credit score. The higher your credit score the higher conventional financing will allow on your total debt ratio, but generally we want to keep your house payment to income at 35% and your total expenses at 45%. The absolute maximum total debt ratio on conventional is 50%.
What are the benefits of a conventional home loan in Papillion NE?
There are numerous benefits to conventional financing that make it the go to program for buyers who qualify.
Conventional mortgage insurance options
A conventional loan does have mortgage insurance but it has advantages over an FHA loan. The first benefit is the most well known and that is conventional mortgage insurance drops off once the home owner gets 20% equity in the home. Plus if you put 20% down you can avoid mortgage insurance completely. It is important to remember that mortgage insurance is a benefit to the lender, not the buyer, so we want to get rid of it as soon as possible. Conventional mortgage insurance can also be structured in a few different ways. You can do the standard monthly MI payment or you can pay a flat fee at close called Upfront MI. This is a flat fee percentage that is added to your closing cost. Upfront MI is also based on credit, debt ratios, and down payment, but can be between .5% and 2% of the loan amount. You can also choose Lender Paid MI. This option allows the lender to pay the mortgage insurance for you in exchange for a higher rate. This will lower your overall payment, but keep in mind that, unlike standard monthly MI, that higher rate does not drop at 20% equity.
Conventional loans are not just for primary homes
Unlike VA and FHA, a conventional loan can be used for investment property, second homes, and vacation homes. If you are looking to start an investment portfolio, I own several rental properties and can help you with financing and getting started as a landlord. The requirements on investment property are more strict on Conventional and require a larger down payment, but they are definitely the way to go for investment. We can also use the future rent on that investment as income before you close. A second home is a home used for vacation or to visit family that is not income producing and is far enough away from your primary home to make sense. Many retired Papillion residents move to warm climate and purchase a second home back in Papillion.
Conventional has low down payment options
Many buyers think they need 20% down with conventional financing, but that is not the case. Conventional has 3% down options for buyers who qualify. If you have excellent credit, but do not have 20% down you can still qualify for conventional financing. Here is some information on the benefits of buying a home with a low down payment.
What are the disadvantages of a conventional home loan in Papillion NE?
We have gone through a lot of the restrictions on conventional already, but there are few other things to consider before going conventional.
The wait period after a bankruptcy
FHA and VA have a 2 year waiting period after Chapter 7 bankruptcy. Conventional requires a 4 year waiting period after a Chapter 7. On a foreclosure the wait period is 7 years on conventional and only 3 years on FHA.
Conventional loans are not assumable
While not used much over the last 20 years due to low rates, but FHA loans can be taken over by a new home buyer. Conventional loans are not assumable. If you want to buy a home and the current owner has a conventional loan you cannot take that loan over but would have to take out new financing at current market rates.
Conventional loans usually have higher rates than FHA or VA
It is almost always true that conventional loans will have a slightly higher rate than FHA or VA. This is usually more than offset by the lower mortgage insurance. However if you have lower credit scores the rate might be significantly higher making FHA the better option.
The only way to really know what loan is right for you is to speak with a local mortgage lender. We are located in Papillion NE and can help guide you through the process.
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