When it comes time to purchase a home, there are many options from which buyers can choose to finance the cost of the home through a mortgage. At the time borrowers apply for a mortgage, their lender will provide them with a few options for the type of mortgage they can choose, depending on the borrowers’ financial situation.
Typically, the most qualified buyers will have higher credit scores, lower debt-to-income ratios, and a larger amount of money that they intend to use for a down payment in a home. Those buyers who are the most qualified and who can make a substantial down payment will oftentimes choose a conventional mortgage.
But there are other options available to borrowers. Even if they are able to qualify for a conventional loan, borrowers could also opt for an FHA-insured loan or possibly even a USDA loan (depending on where the home is located) or a VA loan (if they are active or retired military personnel).
In all these cases, though, a conventional mortgage may be the best route to take, from a financial perspective. Here are four reasons why that’s the case.
1. Conventional Mortgages Can Be Cheaper Over Time
It can sometimes be difficult to make a quick and easy financial assessment of whether a conventional loan or another type of loan would make more sense for a particular buyer, particularly because it depends on a number of factors that are buyer-specific. Generally speaking, though, a conventional mortgage will be cheaper over the life of the loan because it allows buyers to avoid paying certain fees that other loan types require.
Conventional mortgages do come with higher interest rates than other mortgage types, but the trade-off is that buyers who put at least a 20 percent down payment will avoid paying any private mortgage insurance. Conversely, FHA-insured loans will require up-front mortgage insurance equivalent to 1.75 percent of the base loan amount, no matter what the down payment is.
In addition, FHA-insured loans require a monthly mortgage insurance premium (MIP) for all borrowers, again no matter what the amount of the down payment. This MIP will be the for the life of the loan. For borrowers who put more than 10 percent down on an FHA loan (which is rare), MIP falls off after 11 years. PMI is required for borrowers who put less than 20 percent down for a conventional loan, but PMI can be terminated after 80% LTV is achieved, if a consumer requests, or it falls off after 78%.
If borrowers are able to make a 20 percent down payment on their home and qualify for a conventional mortgage with a good credit score and low debt-to-income ratio, choosing that type of loan will generally end up being cheaper over the life of the loan.
2. Conventional Mortgages Help Buyers Afford More House
Conventional mortgages are less restrictive in a number of areas, and one prominent one is that buyers are able to borrow more for their home with a conventional loan. FHA, USDA and VA loans all have lower borrowing limits that are set by the location in which the home is being purchased.
The limits for conventional mortgages also adjust based on location, but national conventional loan limits are around $450,000. This limit is even greater in more expensive areas of the country, such as Los Angeles County in California, where the conventional loan limits are almost $680,000, according to the Fannie Mae and Freddie Mac guidelines.
Conventional loans in this term, then, gives buyers more flexibility if they want to buy a home that is more expensive, or if they are located in an area where most of the homes for sale are on the expensive side.
3. Conventional Mortgages Provide Flexibility
Conventional mortgages also provide buyers the flexibility to purchase properties that may be in need of repair, whereas other types of mortgages might not give the go-ahead in such circumstances. While conventional mortgages will have some guidelines in terms of the condition of the home that is being financed, those guidelines are much less restrictive than that of FHA, USDA and VA loans.
This gives buyers the flexibility of potentially finding a diamond in the rough on the housing market that they can fix up and either live in or possibly add value to the home. This is something that might not be an option for borrowers with other loan types, depending on the home’s condition.
In addition, borrowers can choose conventional mortgages that have a standard length of 30 years with a fixed rate or adjustable rate, or they can also choose 10-year, 15-year and even 20- and 25-year terms with most lenders. By choosing a shorter loan term, the monthly payment will increase, but the loan will be paid off sooner.
4. Borrowers Gain Equity Quicker with Conventional Mortgages
Another great aspect of conventional mortgages is that borrowers will gain more equity in their quicker than through other mortgage types. The reasoning behind this is two-fold:
- Since borrowers with a down payment of 20 percent or more won’t be paying monthly PMI, they may have some financial freedom to put more money per month toward the principal on the loan, which would result in the loan being paid off earlier.
- Because borrowers will often put a larger down payment when financing through a conventional mortgage, they will begin homeownership with more up-front equity.
Equity in a home is one of the most powerful financial tools people can have. That equity can be used at some point for home repairs, as a loan for other expenses or can eventually be rolled into a future down payment for the next home.
An Experienced Lender Can Guide Borrowers
Borrowers who can qualify for a conventional loan may still have questions about whether a conventional loan is the best option for them. An experienced mortgage lender such as Embrace Home Loans can help guide borrowers through the process by analyzing all aspects of the borrowers’ financial situation and that of the home they’re purchasing, and then helping them choose the right type of loan for them.