Buying a house or refinancing a Sonoma County Mortgage? Since January 2012, there’s been a trend towards conventional mortgage loan financing. Conventional financing is your standard conventional/conforming loans ie: 30 year fixed rate mortgages, 15 year fixed-rate mortgages, 20 year fixed-rate mortgages etc.
Conventional mortgages are the most basic types of loan products. They are the most in demand because in most cases they do not contain mortgage insurance. Although in some cases, with consideration less than 20% equity, they can a small monthly mortgage insurance amount, but a substantially lower premium than government loans, such as FHA mortgages.
FHA/VA and USDA mortgages are government loans which contain higher mortgage insurance premiums, thereby making the loans more costly than standard conventional mortgages.
Conventional mortgages are tougher to qualify for, but offer the lowest cost of debt.
Comparing a conventional mortgage to an FHA mortgage using $350,000 as our purchase price/value.
Conventional Mortgage Characteristics:
20% down equates to $70,000
Loan amount $280,000
Monthly principal and interest payment on a 30 year fixed-rate mortgage at 4.0% $1337
Monthly fire insurance $50
Monthly property taxes $365
Total house payment $1751.
FHA Mortgage Characteristics:
3.5% down equates to $12,250
Loan amount $337,750
(FHA loans have upfront mortgage insurance premium of 1% and a monthly mortgage insurance premium of 1.15%)
Financed loan amount $341,128
Monthly principal and interest payment on a 30 year fixed-rate mortgage at 4.0% $1629
Monthly fire insurance $50
Monthly property taxes $365
Total house payment $2353
As you can see, the numbers on the same purchase price, on the same interest rate looking at conventional mortgage versus an FHA mortgage, the monthly savings is $600 per month using a conventional mortgage loan.
In exchange for an extra $57,750, there is $600 per month benefit of the use of those additional funds. Simply put, if you are going to be living in the property and/or having that mortgage loan for 96.25 months which translates to eight years, go with conventional the conventional mortgage. If you might refinance the property, sell or transfer the property going with the FHA loan still makes more sense, despite the higher monthly payment.
How to get the best conventional mortgage loan in your purchase or refinance scenario.
In order to maximize the velocity of your dollars at work, try to secure conventional financing with 20% down and/or 20% equity. The whole 20% down payment can come in the form of a gift for purchases.
*Mortgage Tip: Note if you are buying a house enter putting less than 20% down and are receiving gift funds, 5% of the funds must come from your own funds as the borrower.
Be prepared to deal with tighter debt to income ratios to qualify. For primary residences most mortgage lenders want a debt to income ratio to not exceed 43%. In some cases debt to income ratios can be upwards of 45%. On investment properties and second homes, the ideal debt income ratio requirement is 43% or lower.
To secure the best interest rates on conventional mortgages, the mid-credit score of the qualifying borrower typically needs to be 740. To be in the game, a 700 mid-credit score is required, but the best possible rates are for 740 mid-scores and above. If you qualify for financing, with a sub 740 credit score, work with the interest rate that you can secure with the credit score that you presently have. Trying to increase your credit score 10 points or more higher to save .125% in rate could backfire.
Want to consider going with a conventional mortgage rather than FHA financing?
- Talk to mom and dad or the grandparents about gift money
- Pay off debt to save money on mortgage insurance
- Keep your debt in check-don’t carry high credit card balances if you can avoid it
- Get an appraisal done on the property
- Avoid taking losses on filing income tax returns
- Pay all bills on time (previous old derogatory accounts can sometimes cause hiccups securing conventional financing)
Conventional mortgages usually contain the best and lowest rates available.Get a free mortgage rate quote.Take advantage of The Trend To Conventional Mortgages.
