Are you thinking about purchasing a home in Minnesota or western Wisconsin, but need help finding the best mortgage solution? Below, we outline conventional mortgage loans. You can also visit Edina Realty Mortgage for additional mortgage information.
Fixed rate vs. adjustable rate mortgages
Conventional mortgages are not guaranteed or insured by the federal government. (Learn more about non-government backed loans.) The mortgage can be either fixed rate, with the same interest rate carried through a 15 or 30-year term, or an adjustable rate mortgage.
In an adjustable rate mortgage (ARM), the interest rate is low for an introductory period, and adjusted annually for the remainder of the loan. The introductory period for an ARM can be 3, 5, 7 or 10 years, but all adjustable rate mortgages have a 30 year term. In the case of a 5/1 ARM, the interest rate is set low for the first five years, then adjusts for the remaining 25 years.
The best candidate for an adjustable rate mortgage is someone who plans to live in their home for a very short period of time, particularly someone who plans to sell before the introductory period ends.
Conforming and non-conforming loans
In addition to choosing a fixed or adjustable interest rate, buyers will also choose between a conforming and non-conforming loan. A conforming loan must fall into the standards set by Freddie Mac and Fannie Mae, which are government-sponsored enterprises.
In Minnesota and Wisconsin, the lending limit for a conventional conforming loan is $417,000 for a single family home. The limit for a two-family home, or duplex, is $533,850; each lender will have different requirements and conditions.
So what happens if you want to secure a conventional loan for more than $417,000? In that case, you’d need a non-conforming conventional loan, which is often called a jumbo loan.
Requirements of conventional loans
Because the government does not guarantee them, conventional loans are considered riskier for lenders than FHA or VA loans. For this reason, buyers securing conventional loans must have pristine credit to get the lowest interest rates available. They’ll also need a higher down payment than if they were securing a government-backed loan. This is especially true for buyers securing jumbo loans.
Many private lenders will require that buyers pay for mortgage insurance until they reach 80 percent loan-to-value (LTV) ratio. Your LTV ratio is the amount of money you borrowed divided by the total value of your property. The lower your LTV ratio, the less risk there is for the lender.
Applying for and securing a home loan is a process that requires the help of a home mortgage consultant. For help with your mortgage needs, reach out to Edina Realty Mortgage at any time.