Conventional Mortgages are typically best suited for borrowers with a credit score of around 680 and higher.
The suitability is driven by rate and mortgage insurance premium (assuming required) because as Credit Score falls, typically the mortgage rate increases, making other options, like FHA (see below) more attractive.
Down Payment Requirements
The minimum required Down Payment for a conventional mortgage is 3.0% of the Purchase Price
5.0% down payments are advised however, as loan terms will worsen with lower down payments.
Borrowers with incomes falling below certain thresholds (based on property location) may be entitled to improved mortgage rates and more affordable Mortgage Insurance. Click the button below and see if you may be eligible for an "Affordability Loan".
Click on the button and enter a property address. If your income falls below the 80% AMI you may be able to put down as little as 3.0% and get better Mortgage Insurance terms.
Loan Terms and Fixed Vs ARMs
Conventional Loans are offered as standard Fixed Rate Mortgages (FRM, or "Fixed" loans) and Adjustable Rate Mortgages (or "ARM" loans).
Fixed Rate Mortgages are available in 30-, 25-, 20-, 15- and 10-Year fixed rate terms. Fixed Rate mortgages are considered a safer option over ARM loan because their future payments are stable and predictable.
ARMs, which are typically offered in 30 year terms, have a short, initial Fixed period with a low "teaser" interest rate. The initial fixed period can be 5, 7 or 10 years. After the fixed term ends, the interest rate can adjust every six or 12 months. ARMs are considered riskier than Fixed Mortgages because the interest rates can increase over time, which can increase monthly payments.
Mortgage Insurance is only required on loans with less than 20% down payment. Mortgage Insurance is more expensive when the loan attributes are riskier - i.e. the lower a borrower's Credit Score and Down Payment the higher the monthly premium.
For example, all things being equal, a borrower with a credit score of 700 with a 5% down=payment may pay more Mortgage Insurance each month than a 780 credit score borrower putting 10% down.
Mortgage Insurance on a Conventional loan typically disappears once the Loan-to-Value falls below 78%, which is a huge benefit to Conventional mortgage loan borrowers.
Borrowers of Conventional mortgage loans are not required to pay an upfront Mortgage Insurance premium, however some borrowers may elect to split their premium into an upfront portion and running portion to help ease their housing costs.
Conventional Mortgage Loans do not carry Pre-Payment Penalties.
This means that borrowers can pay off their mortgages at any time without fear of being penalized. This can a benefit to borrowers as they can take advantage of falling rates and refinance at any time.
Conventional loans are the Gold Standard of mortgage lending. They are ultimately financed by Fannie Mae and Freddie Mac - the largest investors of mortgages in the USA - and for this reason they are easier and faster to close, require relatively low amounts of documentation and come with very competitive loan terms.
An FHA loan is the go-to funding solution for borrowers who are light on funds to close, income, or credit score to buy a Primary Residence. These mortgages are guaranteed by the Federal Government, and because of this guarantee, lenders are able to offer FHA loans with lower interest rates.
Many first-time homebuyers believe that FHA loans are the best option because their interest rates are lower, however this may not always be the case. A complete review of each borrower's situation must be completed to establish suitability of an FHA loan.
Down Payment Requirements
The minimum Down Payment requirement for an FHA loan is 3.50% of the loan amount. Many borrowers are drawn conceptually to FHA loans because of the lower down payment requirements, but Conventional mortgages do offer opportunities for a lower down payment (see above).
FHA Loan terms are similar to Conventional Loans with respect to term offerings. They come in Fixed Rate and Adjustable Rate Mortgage (ARM) terms.
Fixed Rate Mortgages are offered in 30-Year and 15-Year fixed rate terms.
FHA Adjustable Rate Mortgages are offered with 30-Year loan terms and a choice of 5-, 7- and 10-Year fixed initial terms.
FHA ARMS are no different to Conventional ARMs in terms of uncertainty of rates and monthly payments in the future. Buyers should have confidence that their income is stable (or rising) and can handle payment shock in the future before considering an ARM loan.
FHA loan limits (think maximum loan amount) are usually lower than that of Convectional Mortgage loans. The maximum Conventional Loan Amount in 2023 is $726,200, however the maximum FHA loan limit is around $472,030. This could be a limitation for some buyers at the higher end of the price range.
There are many factors involved in establishing product suitability. To find out what is appropriate for you and your family, please request a no-obligation consultation request by clicking the button below.
Monthly (or Running) Mortgage Insurance
Upfront Mortgage Insurance Premium
FHA Loans require both an Upfront and Running (monthly) mortgage insurance payment.
FHA Loans do not carry Pre-Payment Penalties.
For Example: A buyer puts down a minimum 3.50% down payment on a $200,000 home purchase. The down payment will be $7,000 (3.5% of $200k) but the buyer will require an upfront mortgage insurance premium of $3,3778 (1.75% of the loan amount) which will be added to the "base" loan amount. This is essentially eats up almost half of the initial equity in the transaction.
The Upfront Mortgage Insurance Premium is equal 1.75% of the loan amount and is required on all FHA loans - regardless the down payment. This amount can be financed into your loan which is helpful because the payment does not need to come out of the borrower's pocket, but results in a loss of equity in the home.
Unlike Conventional Loans, running Mortgage Insurance is required on all FHA loans - even if a 20% down payment is made. The premiums are established based on the down payment and the loan term.
FHA Mortgage Insurance will last the life of the loan if the buyer puts down less than 10% down payment. If the down payment is great than 10% then the mortgage insurance will terminate after 11 years. This is considerably longer than a Conventional Mortgage, which is typically cancelled at 78% of Loan-to-Value.
The monthly premium is starts off at around 0.50% to 0.55% of the loan amount, depending on the down payment.
VA Mortgage Loans
A VA loan is a mortgage offered by the U.S. Department of Veterans Affairs VA (through regular lenders like Alterra). The loans are guaranteed by the US Government and the guarantee means lower interest rates for eligible borrowers.
VA loans are available to active and veteran service personnel and their surviving spouse.
Down Payment Requirements
One of the major benefits to VA loans is that no down payment is required. Eligible borrowers only need to come to the closing table with funds to cover lender and third-party fees (like eligible lender fees and title and settlement costs).
VA loans come only come in the in the standard Fixed Rate and Adjustable Rate Mortgage (ARM) terms. Typically 30Yr, 25Yr, 20Yr and 15Yr fixed rate terms.
ARMs are usually 30Yr loans, but have a choice of Fixed initial terms - like 5, 7 and 10 year fixed terms. After the initial fixed term ends, the rates can adjust. ARMs are typically riskier than Fixed Mortgages because the interest rates can increase over time.
If an unmarried couple are looking for financing both borrowers need to be Veterans.
Funding Fee (aka Mortgage Insurance)
VA loans have something similar to Mortgage Insurance; it is called a Funding Fee and is an upfront fee, paid at the closing, but is typically added onto the mortgage loan amount and because the fee is "financed" into the loan, there is no out of pocket for the borrower at closing. The premium is paid back as principal in your regular month mortgage payments.
VA loans do not require any ongoing monthly mortgage insurance premiums to be paid. This is very different to FHA and USDA loans.
The Funding Fee is essentially the mortgage insurance collected by the VA to cover losses on mortgages in the future.
The funding fee is variable and is dependent on the amount of initial down payment and whether or not the borrower is a first time user of a VA loan. The maximum fee for a first time user is is 2.3% of the loan amount and 3.6% for a repeat borrower.
All VA borrowers must pay the funding fee, unless they are exempt due to having a "Service Connected Disability". We can only determine this by examining your Certificate of Eligibility. Borrowers should have their Form DD214 available early on to assist with this.