At first glance, it might seem all mortgages are the same. But, if you look closer, you'll see there are options, including a conventional home loan. Despite the title, it's actually harder to get one of these than other types of loans, according the "Los Angeles Times." If a lender thinks your credit is too low or your debt too high, you can be turned down.
Typically, the minimum down payment for a conventional loan is 5 percent of the house's cost, though some lenders will want 10 or even 20 percent. Other types of loans, such as Veterans Affairs (VA) loans and Federal Housing Administration (FHA) loans require smaller, or even no, down payments. The more money you put down up front, the more equity you'll have in the house and the less money you need to borrow. If the value of your home drops, you'll have more protection against foreclosure, according to Realtor.com.
Conventional loans usually have a 30-year term with a fixed interest rate. But, you can also pick a 15-year loan with a fixed rate or a 15- or 30-year loan with an adjustable rate. A shorter mortgage term might mean a lower interest rate. In December 2012, the average interest rate for a 30-year fixed loan was 3.52 percent. The average rate for a 15-year fixed loan was 2.85 percent, according to Bankrate.com. Picking an adjustable rate loan means you're hoping interest rates will drop.
There's no government agency, such as the Federal Housing Administration (FHA) or Veterans Affairs (VA), to guarantee or insure a conventional mortgage. That leaves the lender with no protection if the borrower stops payments. To make up for that, the lender usually requires a higher down payment than he would for an insured loan. He'll also expect you'll have a stronger credit score and a lower debt to income ratio. Your lender might also want you to pay private mortgage insurance (PMI) if you make a down payment of less than 20 percent. PMI protects the lender if you default.
Your credit score plays a starring role in determining the interest rate you get with a conventional home loan. A 2012 report in the "San Diego Union Tribune" noted that a score of 680 or more was preferred by lenders. Scores above 740 translated to the best rates. If your score is 720 or higher, you might land a rate of 3.70 percent as of 2012, according to the "New York Times." Compare that to the 5.07 percent rate you could end up with if your score is 620.
- Realtor: Refinancing to a Conventional Mortgage
- San Diego Union Tribune: 5 Myths About Credit Scores and Mortgages
- NY Times: How to Pump Up Your Credit Score
- LA Times: Qualifying for a Mortgage Has Gotten Much Tougher, Analysis Shows
- Bankrate: Current Mortgage Interest Rates
- Bankrate: Conventional Mortgage Can Save Cash
- NY Times: Private Mortgage Insurance Easier to Obtain
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