What’s a Conventional Mortgage? A Primer on the Most Common Form of Home Loan
Nearly all those who decide to become a homeowner do so with the assistance of a mortgage, but it can be hard to understand what the different mortgage products are and how they differ from one another. There are numerous programs available to help buyers settle into their own home – not to mention thousands of different lenders offering mortgages – so it’s important to have a clear idea of what each one is. Today, we’ll talk about the most common type of home loan, how to qualify for this loan, and how a mortgage broker can make the home buying process a breeze for buyers of all stripes.
A conventional mortgage is one offered by private lenders with no government backing
As might be expected from the name, a conventional mortgage is essentially the blueprint product of the mortgage industry, the standard by which all other home loans are judged. It is an agreement between a lender, usually a bank, and a homeowner, that the lender will pay for the home upfront, and the homeowner will pay them back in installments with interest. The interest rate can be fixed or adjustable, and the timeline for repayment is usually either 15 or 30 years.
It’s important to note that while conventional loans are not backed up by the government – meaning that if you default, the bank will lose money – there is still government involvement in all conventional mortgages. Fannie Mae and Freddie Mac, which are government sponsored enterprises, help provide liquidity to the housing market by working with thousands of banks. However, they will not “bail out” banks who lose money on mortgages: the loan contract is exclusively between bank and borrower.
Because these loans are not insured by the government, the requirements are much stricter
As you might imagine, banks are leery of lending funds that they’re not sure will be repaid, which is why they have strict requirements for who they will lend to. Typically, you cannot apply for a conventional mortgage if you have a credit score below 620, and many lenders will want a score much higher than this minimum. They’ll also need you to show you have a low debt-to-income ratio; this means that you’re paying no more than 43% of your income every month to the minimum payments of credit cards and loans. Finally, you’ll need to save up quite a lot of money for a down payment, which can be anywhere between 10% to 20% of the overall cost of the home.
This can all seem incredibly overwhelming when you’re thinking of purchasing your very own home, especially if you have little experience with the real estate market. You may not realize that you have numerous options for lenders, so focused on ensuring you meet those minimum requirements.
With all this to think about, it’s important that you have someone in your corner, who can help guide you through the mortgage application process and find you the best deals. A mortgage broker is exactly that: an advocate for you, who can negotiate with many lenders to get you the very best mortgage rate you can possibly find.
Mortgage brokers work with lenders on behalf of borrowers
If you go to a bank to get a mortgage, everyone you interact with in relation to the loan has the best interest of the bank in mind. The individuals who sell you the product, who take you through the process, and who finally seal the deal are working for the lender, which means that they have a strong incentive to make sure that the bank gets the highest interest rate you’ll agree to. Unless you’re a professional negotiator, it’s unlikely that you’ll come out of the office sure that you have gotten the lowest interest rate and the most favorable terms possible.
But what if you could work with a professional negotiator – one who has years of experience in the mortgage industry and is familiar with dozens of different lenders? This is called a mortgage broker, and they are an essential part of the home lending process for thousands of borrowers just like you.
When you work with a mortgage broker like District Lending to secure your conventional mortgage, you’re relying on their strong connections to lenders, as well as their deep familiarity with every component of the real estate industry. They are working for you rather than the banks, and they want to make sure that you’re completely happy when you close the deal on your new home.
Mortgage brokers can hunt through dozens of different mortgage products to find one that best matches your particular circumstances, and they will also assist you in getting your application ready. Better yet, they can also help you down the line if you ever choose to refinance your home; working with a mortgage broker means you are building a helpful alliance all throughout the life of your loan.
The home buying process is confusing, but it doesn’t have to be: with your newfound knowledge of conventional loans and the awareness of how much mortgage brokers can help, you can feel confident as you begin your hunt for the perfect property.