What Are the Benefits of a Conventional Mortgage?

It can be difficult to get started in obtaining a home. You’re forced to decide between homes, loans, and price points, each with its array of mortgage types and its own unique terms and benefits. One of the most popular and straightforward options for many homebuyers is the conventional mortgage. 

 

But what is it, and why might it be the right choice for you? This article will delve into the specifics of conventional mortgages, highlighting their many benefits and helping you understand if this financing option aligns with your home-buying goals.

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What is a Conventional Mortgage?

A conventional mortgage refers to any home loan that isn’t insured or guaranteed by the federal government. Unlike government-insured loans such as Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans, conventional loans are offered through private lenders and conform to the guidelines set by Fannie Mae and Freddie Mac.

 

There are two types of conventional loans: conforming and non-conforming. Conforming loans follow the maximum loan limits set by Fannie Mae and Freddie Mac, while non-conforming loans, often referred to as jumbo loans, exceed these limits.

Low Interest Rates

One of the most attractive benefits of a conventional mortgage is the potential for lower interest rates. Typically, if you have a good credit score and a sizable down payment, you can secure a highly competitive interest rate. This can lead to significant savings over the life of the loan. Lower interest rates also result in lower monthly payments, making homeownership more affordable on a month-to-month basis.

 

Furthermore, with a conventional loan, if your credit score improves or market interest rates drop, you have the option to refinance your mortgage. Refinancing could further reduce your interest rate and monthly payment, offering more savings over time.

Flexible Loan Terms

Conventional loans offer a range of terms, allowing you to choose a timeline that fits your financial goals. Terms commonly range from 10 to 30 years, with 15 and 30-year terms being the most popular.

Choosing a longer-term, such as 30 years, results in lower monthly payments, which can make budgeting easier. On the other hand, a shorter term, like 15 years, comes with higher monthly payments but allows you to build equity faster and pay less interest over the life of the loan.

 This flexibility empowers you to select a loan term that aligns with your financial situation and homeownership goals, making conventional loans an appealing option for many borrowers.

Credit Score Requirements: Accessibility for Many Borrowers

Conventional mortgages often have more flexible credit requirements than government-backed loans, making them an accessible option for a wide range of borrowers. While exact requirements can vary by lender, you can typically qualify for a conventional loan with a credit score as low as 620. However, the best interest rates are generally reserved for borrowers with credit scores of 740 or above.

It’s worth noting that even if your credit score is less than perfect, you can still potentially qualify for a conventional loan. Lenders will also consider factors like your income, employment history, and overall financial health.

Down Payment Options in Conventional Mortgages

One of the most significant benefits of conventional mortgages is the variety of down payment options. While many believe a 20% down payment is required, some conventional loans can be obtained with down payments as low as 3%.

A larger down payment can help lower your monthly payments and potentially eliminate the need for Private Mortgage Insurance (PMI), but a lower down payment can help make homeownership more immediately accessible. This flexibility allows you to choose a down payment amount that aligns with your financial situation and goals.

Conventional Loans and Private Mortgage Insurance (PMI)

For conventional mortgages with a down payment of less than 20%, lenders typically require Private Mortgage Insurance (PMI). PMI protects the lender if the borrower defaults on the loan.

The cost of PMI varies based on the size of the down payment and your credit score but is typically a percentage of the loan amount. The good news is that once you’ve built up 20% equity in your home, either through payments or appreciation, you can request to have the PMI removed, which will lower your monthly payment.

Property Standards for Conventional Mortgages

When it comes to the type of property you can purchase, conventional loans offer a great deal of flexibility. They can be used to buy a primary residence, a second home, or an investment property. Additionally, there are fewer property condition requirements compared to government-backed loans. 

However, the property must still appraise for the purchase price and meet certain safety and livability standards. The exact requirements can vary by lender, so it’s essential to discuss these details with your loan officer when considering a conventional mortgage.

Benefits of Conventional Mortgages for Investment Properties

Conventional mortgages provide a fantastic route for investing in real estate, especially in thriving markets like Portland and Seattle. Since these loans can be used for investment properties, they allow you to expand your real estate portfolio beyond your primary residence.

 The flexibility of terms, potential for lower interest rates, and diverse down payment options make conventional loans a practical choice for investors. Moreover, unlike certain government-backed loans, there’s no limit on the number of properties you can finance with conventional loans, provided you meet the lender’s qualifications. This can be particularly beneficial for investors aiming to capitalize on the growth and strong rental markets in Portland and Seattle.

Is a Conventional Mortgage Right for You?

Determining whether a conventional mortgage is right for you involves evaluating your financial situation and homeownership goals. Here are a few key considerations:

  • Credit Score: As discussed, you’ll typically need a credit score of at least 620 to qualify for a conventional loan. A higher score can yield better interest rates.
  • Down Payment: Do you have enough saved for a down payment? With conventional loans, you have flexibility, but a larger down payment can result in lower monthly payments and potential PMI removal.
  • Property Type: Conventional loans can be used for various property types, including primary residences, second homes, and investment properties. The type of property you wish to purchase could influence your loan choice.
  • Local Market: The housing market in your area, such as in Portland or Seattle, might also influence your decision. In high-cost areas, jumbo loans may be necessary to finance a home.

Navigating the Application Process for Conventional Mortgages

The application process for a conventional loan involves several steps: pre-approval, home shopping, making an offer, home inspection and appraisal, underwriting, and closing. Throughout this process, your lender will need various documents, including credit history, employment verification, and financial statements, to assess your creditworthiness.

 While the process might seem complicated, working with a knowledgeable lender can significantly smooth the journey. In hot markets like Portland and Seattle, being pre-approved can also give you an edge in competitive bidding situations.

The Benefits of a Conventional Mortgage

In conclusion, conventional mortgages offer a multitude of benefits, including lower interest rates, flexible terms, varied down payment options, and the ability to finance diverse property types.  

Whether you’re a first-time homebuyer, seasoned homeowner, or real estate investor, especially in vibrant markets like Portland or Seattle, a conventional mortgage can provide a flexible, cost-effective financing solution to help you achieve your real estate goals.

Ready to Explore Your Conventional Mortgage Options? Contact River Capital PDX Today!

Our team of experienced mortgage professionals is ready to help you navigate the nuances of conventional mortgages, from understanding loan terms to guiding you through the application process and getting you home. 

Whether you’re considering purchasing a primary residence, second home, or an investment property in Portland or Seattle, we’re here to help you make the best decision that aligns with your financial goals.

 Contact River Capital PDX today to explore your conventional mortgage options. We’re excited to help turn your homeownership dreams into reality!