Conventional Mortgages: A Guide for First-Time Home Buyers

Buying your first home is an exciting milestone, and understanding your financing options is crucial. One of the most common types of home loans is a conventional mortgage. Here’s what you need to know as a first-time home buyer.

What is a Conventional Mortgage?

A conventional mortgage is a home loan that is not insured or guaranteed by the federal government. Unlike FHA (Federal Housing Administration) or VA (Veterans Affairs) loans, conventional mortgages are backed by private lenders such as banks, credit unions, and mortgage companies. They typically conform to the guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises.

Types of Conventional Mortgages

There are two main types of conventional mortgages:

1. Conforming Loans

These loans adhere to the maximum loan limits set by Fannie Mae and Freddie Mac. For 2024, the baseline conforming loan limit for a single-family home is $726,200 in most areas.

2. Non-Conforming Loans

Also known as jumbo loans, these exceed the conforming loan limits and are used for purchasing higher-priced homes.

Down Payment Requirements

One of the key features of conventional mortgages is the down payment requirement. While it’s possible to secure a conventional loan with as little as 3% down, a down payment of 20% or more can help you avoid private mortgage insurance (PMI), which is an additional monthly cost that protects the lender if you default on the loan.

Credit Score and Income Requirements

Conventional mortgages typically require a higher credit score compared to government-backed loans. A minimum credit score of 620 is usually needed, but a score of 740 or higher can secure you the best interest rates and terms. Additionally, lenders will assess your income, employment history, and debt-to-income ratio (DTI). A DTI ratio below 36% is generally preferred, although some lenders may accept higher ratios.

Interest Rates

Interest rates for conventional mortgages can be fixed or adjustable. 

-Fixed-Rate Mortgages: The interest rate remains constant throughout the loan term, providing predictable monthly payments. Common terms are 15, 20, and 30 years.

- Adjustable-Rate Mortgages (ARMs): These loans start with a lower fixed interest rate for an initial period (typically 5, 7, or 10 years), after which the rate adjusts periodically based on market conditions. ARMs can be beneficial if you plan to sell or refinance before the adjustment period begins.

Private Mortgage Insurance (PMI)

If your down payment is less than 20%, you will likely need to pay for PMI. This insurance protects the lender in case you default on your loan. PMI costs vary but are typically 0.3% to 1.5% of the original loan amount per year. Once your loan-to-value ratio (LTV) reaches 80%, you can request to cancel PMI.

Advantages of Conventional Mortgages

1. Flexibility: They can be used to purchase a primary residence, second home, or investment property.

2. Loan Amounts: Higher loan limits compared to some government-backed loans.

3. No Upfront Mortgage Insurance: Unlike FHA loans, there’s no upfront mortgage insurance premium (UFMIP).

Disadvantages of Conventional Mortgages

1. Stricter Requirements**: Higher credit score and income requirements compared to FHA or VA loans.

2. PMI for Lower Down Payments: An additional cost if you don’t put down at least 20%.

Steps to Secure a Conventional Mortgage

1. Check Your Credit: Ensure your credit report is accurate and work on improving your score if necessary.

2. Save for a Down Payment: Aim for at least 20% to avoid PMI, though 3-5% can be acceptable.

3. Get Pre-Approved: Obtain a mortgage pre-approval from a lender to understand your budget and show sellers you’re a serious buyer.

4. Gather Documentation: Be prepared to provide proof of income, employment, and assets.

A conventional mortgage is a popular choice for first-time home buyers due to its flexibility and potential for favorable terms. By understanding the requirements and steps involved, you can navigate the home-buying process with confidence and find a mortgage that suits your financial situation. Please reach out if you have any further questions or need a recommendation of a great Mortgage Lender as we have a few trusted lenders that we would be happy to connect you to.

Sierra Haskins

530-632-9028

The NorCal Life Real Estate Group

eXp Realty / Lic 02146483