Whether you are buying a house for the first time or the third time, you will likely be using a mortgage. A mortgage is a form of financing a property with a set amount of payments over a set period of time. Mortgages are also referred to as “liens against property” as the lender can foreclose on the property if the borrower does not pay. There are several different kinds of mortgages. In this first part of our mortgage series, we will be discussing conventional loans.

What are Conventional Loans?

Some mortgages are backed by the government to encourage the lender to give mortgages to a broader range of people. Conventional loans, however, are not backed by the government and thus are more difficult to qualify for. A minimum credit score of 620 is usually recommended but having a score above 740 will tend to provide you the best interest rates. While you can get a conventional loan with a down payment as low as 3%, putting down over 20% will prevent you from having to pay PMI, private mortgage insurance. This is an additional payment added on every month to protect the lender.

Types of Conventional Loans

Within conventional loans, there are two main categories: conforming and nonconforming. Conforming loans do just that: they conform to the standards set by Fannie Mae and Freddie Mac, which are two government sponsored enterprises that fund the majority of mortgages. Nonconforming loans simply do not follow those standards. The most common rule that determines what category the loan falls into is the size of the loan. The loan limit for 2021 for most of the United States is $548,250. Loans larger than this are considered “jumbo loans” and have more fees and qualifications as they are riskier.

Advantages of Conventional Loans

Although conventional loans are harder to qualify for, they offer plenty of advantages over government-backed loans. Conventional loans can be used for a greater variety of properties and prices while government-backed loans tend to limit themselves. For example, investment properties tend to be funded by conventional loans as they tend not to meet government loan standards. Another huge advantage of conventional loans is the ability to control your mortgage insurance. Your PMI on a conventional loan can be avoided entirely by providing over a 20% down payment. Once your loan balance drops to 78%, your mortgage insurance can be terminated as well. On the other hand, mortgage insurance on government-backed loans can last for the entire duration of the loan. The other main advantage of a conventional loan is the customization of it. You can have a loan lasting various different lengths such as 30 or 15 years. You can even pick between fixed rate mortgages and adjustable rate mortgages.   We hope that this post proved insightful for you and helped you understand conventional loans! Stay tuned for the next part of our mortgages series where we will cover FHA loans.   If you decide to sell your home or buy a new one, whether it is the first time or the third time, the Love Orlando Real Estate Team is here to help you every step of the way. With decades of combined experience, you will be hard-pressed to find a team that can serve you better in the Central Florida area.