Conventional Mortgages 101

In our last blog post we at Narwhal discussed the FHA mortgage option. We looked at the down payment requirements, mortgage insurance, rates, etc. Today we will be doing the same with the most common type of mortgage, the conventional mortgage.

The conventional mortgage presents an attractive option for homebuyers, offering greater flexibility compared to FHA loans. While FHA mortgages are limited to primary residences and cannot be used for vacation homes or rental properties, conventional mortgages accommodate such purposes, subject to a minimum credit score requirement of 620, which is higher than that of an FHA loan. Moreover, conventional mortgages often require a down payment of just 3%, lower than the FHA's requirements for borrowers who have not owned a home within the last three years. If they have owned a home within the past three years, the minimum down payment for a home becomes 5% for conventional loans.

One of the major advantages of a conventional mortgage is the automatic termination of mortgage insurance. When the loan balance reaches 78% of the home's original value at the time of completing the mortgage, the lender must automatically remove the mortgage insurance. Additionally, at 80% of the home's value, borrowers can request their lender to eliminate the mortgage insurance. This benefit is not typically offered with many FHA mortgages, often necessitating the need to refinance in order to remove the private mortgage insurance. Furthermore, private mortgage insurance for conventional loans tends to be more cost-effective, especially for borrowers with higher credit scores.

While some homebuyers might initially opt for an FHA loan with the intention of later refinancing to a conventional loan, this approach comes with certain risks. For instance, those who chose FHA loans during periods of low interest rates in 2020 and 2021 may find it less feasible to refinance, as doing so would mean giving up a more favorable rate. Additionally, if home prices have declined, and the Loan-To-Value ratio has risen, refinancing to a conventional loan may become unviable.

In conclusion, a conventional loan can often be a more advantageous long-term option in certain situations. Prospective buyers must carefully evaluate all available choices, taking future considerations into account when making this crucial decision.