A Brief Guide To Conventional Loans In Texas
If you’re shopping for a mortgage, you’ll undoubtedly come across the term “Conventional Loans” or “Conventional Mortgage” at least once. Learn more about the meaning of conventional in the mortgage industry, and how to determine whether it’s a suitable type of home loan for you.
What Is a Conventional Loan?
Generally, it is a form of mortgage loan that isn’t guaranteed or insured by the government. The loan is usually backed by private lenders, while the borrower pays its insurance. In comparison to government-backed financing, conventional loans are more common. There are two major groups of conventional loans: conforming and non-conforming loans.
Typically, conventional loans stick to lending rules set by the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). Some lenders, however, might offer some flexibility when it comes to non-conforming loans.
How Does it Work in Texas ?
Conventional loans are originated and serviced by various private mortgage lenders such as credit unions, banks, and other financial institutions. All of these also provide government-insured mortgage loans. Generally, Conventional Loans in Texas don’t have some of the same features as government-insured loans, like low credit score requirements and no mortgage insurance or down payment.
If you’re looking for a conventional loan, you can get approved with a credit score that’s as low as 620. However, some lenders might be looking for a score of 660 or better. And although you could qualify for a conventional loan, your interest rate will mainly rely on your credit score and the overall credit history. If you have a better credit score, the less you’ll incur in interest over the loan period.
With a down payment requirement of as low as 3%, you can obtain conventional mortgage loans. However, some lenders comprise special programs that provide up to 100% financing. But if you don’t come up with 20% or more, the lender often requests you to get private mortgage insurance, and this can cost from 0.3% to 1.5% of your loan amount (annually). Typically, conventional loans run for 30 years. However, you can still qualify for a traditional mortgage loan that runs for 15 or 20 years.
How Is a Conventional Loans in Texas Different from a Government-Insured Loan?
Typically, government-backed mortgage loans consist of unique perks that can make them suitable for certain homebuyers. The two major government-backed loans are USDA loans and VA loans. Although different government agencies insure these loans, it is private lenders that provide them to borrowers – and these are the same lenders that also provide conventional loans. Apart from the special programs some lenders might provide, Conventional Loans in Texas don’t have most of the perks government-backed loans offer across the board.
For those trying to choose between a government-backed loan and a conventional loan, the suitable one for you relies on your financial situation. For those who have high credit scores of more than 740 and you can manage to make a 20% down payment, then a conventional loan might offer you the best interest rate at the lowest fees. Before you can apply for a mortgage, improving your credit score can help you in qualifying for a conventional mortgage and might also reduce the mortgage interest fees and rate to obtain the loan.
What Are the Different Types of Conventional Loans in Texas?
There are many types of conventional loans that you might discover as you compare mortgage options and lenders. Below are some of the popular ones:
Conforming loans. These are loans that stick to the standards set by Freddie Mac and Fannie Mae, including the maximum loan amounts.
Amortized loans. They’re fully amortized, which gives home buyers a specified monthly payment from the start to when the loan repayment period ends, without a balloon payment. These types of loans can have mortgage rates that are either fixed or adjustable.
Jumbo loans. In case the amount you want to borrow exceeds the lending limits set for conforming loans, you could look for lenders that deal with jumbo mortgage loans. Typically, jumbo loans need higher credit scores compared to conforming loans, and you might also need to have a considerably lower debt-to-income ratio (DTI) and come up with a larger down payment.
Adjustable loans. Throughout the life of a fixed-rate mortgage loan, the interest rate and the monthly payment are always the same. However, with an adjustable-rate mortgage loan, you’ll obtain a fixed interest rate for a specified period, usually between 3-10 years.
Subprime loans. They require that you have a DTI below 50% and a 620-credit score or higher. However, if your credit score isn’t quite there, you might qualify for a subprime mortgage loan.
Portfolio loans. It is a conventional loan that a lender decides to keep in its portfolio instead of selling it on the secondary market, which is a common thing but demands that loans adhere to Freddie Mac’s and Fannie Mae’s standards.