Conventional Home Loan Folsom, CA
What is a Conventional Loan?
A conventional loan is one that is not backed by the Federal Government. It adheres to the underwriting guidelines of government sponsored enterprises, Fannie Mae or Freddie Mac. This makes it possible for lenders to offer reasonable rates, realistic underwriting, and the absence of mortgage insurance if the homeowner puts down 20% or more as a down-payment.
What Is A Government Sponsored Enterprise?
GSE’s were set up by Congress to reduce the risk to investors and increase transparency. While they are not owned by the government, they have the implicit guarantee that the government will not let them fail or default. As a result, lenders grant Fannie Mae and Freddie Mac favorable interest rates and investors offer more for their securities.
How Does A Conventional Loan Work?
Lenders make conventional loans directly to consumers. As long as the loans meet Fannie Mae or Freddie Mac’s guidelines, the GSE’s purchase the loan. Loans are packaged into securities, and then sold to investors for their portfolios. As a result, the lender is freed up to make more loans.
Highlights of the Conventional Loan:
- Loan Purpose: Purchase, Refinance, Cash-Out Refinance
- Loan Types: Owner Occupied, 2nd Home, and Investment
- Property Types: Single Family Residences, 1-4 Family, PUD (townhomes or single family residences part of a Planned Unit Development), Condominiums, Manufactured, and Modular
- Low Down Payment Purchase: First-Time Homeowners can purchase with as little as 3% down with mortgage insurance.
- Standard Down-Payment: 5% with mortgage insurance and 20% down without mortgage insurance.
- Credit Requirements: Ideal for borrowers with strong credit histories
- Investor Loans: Can go up to 10 financed properties
- Non-Occupying Co-Borrowers: Permitted for owner occupied properties through Freddie Mac
- Gift Funds: Yes – No minimum borrower contribution is required for 1-Unit owner occupied properties. Gifts are not permitted for investors
- Who is Eligible? Borrowers with moderate to strong credit history from 1st time buyers to seasoned investors
- Income Limitations: None for qualifying borrowers
- Asset Requirements: Reserve requirements vary depending on whether it is a 1-unit, 2-unit or 3-4 unit. Check for requirements
- Reserve Requirements: None required for owner occupied
- Foreclosure Seasoning: 7 years after foreclosure
- Short Sale Seasoning: 4 years after short-sale
- Bankruptcy Seasoning: 4 years after Chapter 7 bankruptcy and for a Chapter 13 bankruptcy 2 years after dismissal or 4 years after discharge
What Are The Benefits of using a Conventional Loan?
A couple of the great benefits of conventional loans is their flexibility and utility. Unlike FHA and VA Loans that are designed only for owner occupied purchases and refinances, the conventional may also be used for second homes (vacation) and investments. As long as you put at least 20% down, it does not have mortgage insurance and permits you to finance up to 10 properties. While the guidelines may be a bit tighter than other loans, it offers a competitive rate while letting you do a lot.
What Can Conventional Loans Be Used For? Conventional loans provide many options for owner occupied, second home and investment property borrowers on 1-4 unit properties. These include purchase, refinance and cash-out. Conventional loans may not be used for commercial financing which includes any property over 4-units.
Who Qualifies For A Conventional Loan? Conventional loans typically have stricter requirements for approval than most government loans. They are ideal for borrowers with excellent FICO Scores, strong job stability, and larger down payments. You must prove credit worthiness as seen on your mortgage credit report, supportable income, stable employment history, and sufficient assets for down-payment, closing costs and reserves if required.
Ineligible Borrowers include foreign nationals, borrowers with diplomatic immunity, those without a valid social security number, Living Revocable Trusts, and a Conservator or Guardian to a borrower.
Income Qualification For A Conventional Loan? Whether you’re salaried, hourly, commissioned or self-employed, it’s okay. Everyone is paid differently, and what is important is to show a stable and consistent annual income for qualification. Income must be documented on your tax returns over the past two years and there is an expectation that it will continue for the next three years. While you might receive a base salary that you can count on, you may also have commission, overtime or self-employed income. We will average your variable income or loss over the past two years using your 1040 tax returns or business tax returns. This will then be added to your base salary or hourly pay.
Asset Qualification For Conventional Loans? A variety of asset accounts may be used for your down-payment, closing costs, and reserves if required. Whether you are using a checking account, brokerage account, selling a car, or taking a loan out on your 401k, assets must be clearly documented. The Patriot Act, designed to make sure you are not a terrorist or money launderer, means the federal government oversees the movement of money very carefully. You must clearly show that the money was yours for the past two months and the trail must be very evident over that period of time.
Do I Need 20% For A Down-Payment? Although most people think they need to put 20% down for a conventional loan, it actually permits as little as 3% down payment for a qualified First Time Homebuyer with special program Mortgage Insurance.
Is An Impound Account Required On A Conventional Loan? Impound accounts are only required in California if the loan to value is 90% or greater.
What Is An Impound Account? An impound account is when the lender collects property taxes and insurance on a monthly basis and then pays them when they are due. Taxes are due in November and February and late in December and April. Insurance is typically due once per year. Depending on the month that a loan is made, it will dictate how much will be required to fund the impound account so that there is consistently enough money in the account when the payment is due. It is a good idea to request an impound account audit from the service three months after getting the loan to make sure that the lender is collecting the right amount.
What Properties Are Eligible For A Conventional Loan? Conventional loans offer quite a bit of flexibility when it comes to eligible financeable properties. The first thing to know is that the loan is intended for residential properties with 1-4 units. This includes primary residences, 2nd homes, or investment properties. Anything over 4-units is considered commercial and is ineligible. Common eligible properties include: Single Family Residences, 2-4 units, Condos, PUD (planned unit developments such as townhomes), modular homes, and manufactured homes on a permanent foundation.
Ineligible properties include but are not limited to any that have mixed use such as a working farm or Bed and Breakfast, condos with pending litigation, personal property such as a houseboat or mobile home, and specialty homes such as a dome house.
What Terms Are Available On Conventional Loans? Loan terms for conventional loans come in Fixed Rate and Adjustable Rate Mortgages (ARMs). A fixed rate is where the interest rate is fixed and the payment stays the same throughout the entire term of the loan. Initially the payment is a much greater amount interest and then decreases over time and the amount of principal increases until the loan is paid off. Typical Fixed Rate Periods are 30-Year, 20-Year, 15-Year, and 10-Year.
An ARM means that the interest rate is variable and can change over the life of the loan. Common to a conventional loan is a Hybrid ARM, which means that the rate is fixed for a period of time and then becomes adjustable. Typical Hybrid ARMs Periods are 5/1, 71, and 10/1.
Do I Need Mortgage Insurance For A Conventional Loan? No, you don’t need mortgage insurance on a conventional loan if you put 20% or more in as a down-payment. For Conventional Loans, mortgage insurance (insurance required by lenders to protect them if a borrower defaults on their loan) is provided by a private company. It is called Private Mortgage Insurance or PMI. If you come in with less than 20%, the conventional loan will require PMI.
Are There Different Private Mortgage Insurance Options? For standard conforming loan amounts, there are several different configurations for mortgage insurance. It can be paid monthly by the borrower or lender, paid in a single premium up front by the borrower or lender, or Split MI where part is paid up front and part is paid monthly. For High Balance amounts, the scenarios are similar but with a maximum of 90% loan to value.
Can I Remove Private Mortgage Insurance? PMI is typically only required for two years and may be removed once there is at least 20% equity in the home. Each lender has different requirements for removing mortgage insurance. However, unlike FHA Loans, where mortgage insurance is required for a set period of time depending on original down payment, PMI may be discontinued if it meets the lender’s requirements.
Can I Use A Conventional Loan To Buy Investment Properties? Yes conventional loans may be used for investment property. One of the most important challenges a Real Estate Investor encounters is getting financing for their investment homes. Conventional Loans can be an effective way to get this done with competitive pricing and realistic underwriting guidelines.
Comparatively, other government loans (FHA, USDA, and VA) do not permit investment property financing. Portfolio (alternative bank financing) and private money (also known as hard money loans) may have significantly higher interest rates.
How Many Borrowers Can Be on a Conventional Loan? You can have up to 4 individuals on a conventional loan.
What Is A Seller Contribution To Closing Costs? In order to keep the cash to close down on purchase transactions, the seller may pay part or all of the buyers’ closing costs and prepaid items up to a certain percentage of the sales price. These include but are not limited to lender fees, escrow fees, third party fees, impound account reserves, odd day’s interest, first year’s hazard insurance, taxes, and mortgage insurance. The borrower is still responsible for their down payment, whether gifted or from their own funds.
What Is The Maximum Seller Contribution A Seller Can Make? If you are putting less than 10% down on a primary residence, the maximum seller contribution is 3%, if putting down 10%-24.99% then the max is 6% and if putting 25% down or more the max is 9%. The max seller contribution for an investment property is 2%.
How to Get Started:
To start the loan process, it is pretty simple. Fill out an application on-line at http://ironpointmortgage.com/apply-here/ or call us at (916) 985-3200 for an application over the phone.