If you work with clients who are interested in buying a home, you may want to steer them towards getting a conventional loan. In 2023, there are several reasons why a conventional loan will be more advantageous for homebuyers than other types of loans. Keep reading to learn more!
What is a Conventional Loan?
Before we get into the reasons why a conventional loan is the best choice for your clients, let’s first review what a conventional loan is. A conventional loan is a mortgage that is not backed by the government. This means that the guidelines are set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises.
There are two types of conventional loans: conforming and non-conforming. A conforming loan conforms to the guidelines set by Fannie Mae and Freddie Mac. A non-conforming loan does not meet these guidelines. The most common type of non-conforming loan is a jumbo loan, which is a loan for an amount that exceeds the limit set by Fannie Mae and Freddie Mac.
Reasons Why Your Clients Should Get a Conventional Loan
1. Low Down Payment Requirements
One of the benefits of getting a conventional loan is that the down payment requirements are lower than they are for other types of loans. For a conforming loan, your clients will need to put down at least 3% of the purchase price of the home. For a jumbo loan, the minimum down payment is 10%.
2. More Lenient Income and Debt Requirements
Another reason to encourage your clients to get a conventional loan is that the income and debt requirements are more lenient than they are for other types of loans. For example, the debt-to-income ratio requirement for a conforming loan is capped at 50%. This means that no more than 50% of your client’s monthly income can go towards paying debts, including their mortgage payment, car payment, credit card payments, etc.
3. Fixed-Rate Mortgage Options
Another advantage of getting a conventional loan is that there are fixed-rate mortgage options available. With a fixed-rate mortgage, your client’s interest rate will remain the same for the life of the loan, which gives them predictability when it comes to their monthly mortgage payments.
4. Adjustable-Rate Mortgage Options
If your clients are looking for an adjustable-rate mortgage, they can also find this option with a conventional loan. With an adjustable-rate mortgage, the interest rate will change over time based on market conditions. This type of mortgage can offer your clients lower interest rates and monthly payments at first, but there is also more risk involved because their payments could increase in the future if market conditions warrant it.
5. Private Mortgage Insurance Requirement Waived With 20% Down Payment
Another perk of getting a conventional loan is that private mortgage insurance (PMI) is typically only required if your clients make a down payment that is less than 20% of the purchase price of the home*. PMI protects lenders in case borrowers default on their loans; however, it can be costly for borrowers because it typically adds 0.5%-1% of the total loan amount onto their annual mortgage payment**. Waiving this requirement can help save your clients money each year on their mortgage payments.
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In conclusion, there are several reasons why you should help your clients get a conventional loan in 2023: low down payment requirements; more lenient income and debt requirements; fixed-rate and adjustable-rate mortgage options; private mortgage insurance requirement waived with 20% down payment.
*Private Mortgage Insurance (PMI) may still be required if HomeReady or Home Possible qualification criteria aren’t met even with 20%+ down payment.)
**This percentage may vary depending on factors like credit score.) Talk to one of our licensed Account Executives today about how we can help you!