Reverse Mortgage Myths #1: The bank or lender owns your home. Probably the biggest misconception…
Conventional loans are one of the best loans for refinancing your house. The only loan that has lower rates and better terms than a conventional loan is a VA loan. VA loans are limited to people serving or that have served in the Armed Forces.
Most loans are backed by Fannie Mae and Freddie Mac.
Terms for Conventional loans range from 8 years to 30 years. Some lenders might offer 40 year loans.
You can get a fixed rate, Adjustable Rate such as a 3/1, 5/1, 7/1 or a 10/1.
If you have a top tier credit score in the 700’s, you could take advantage of getting a very competitive rate with a Conventional Loan.
Taking advantage of a Conventional Loan
There’s many options when it comes to a conventional Loan such as:
- Conventional refinances for Investmoent Homes (Non-Owner Occupied)
You can get great financing on a rental home for 1-4 unit residences.
Government-backed loans like FHA, the VA mortgage, and USDA home loan care restricted to just financing of Owner-Occupied homes at the time you obtain the loan.
A conventional refinance loan can be used for a primary residence, second home, or investment (rental) property. There are no restrictions on the type of occupancy.
- Cash out / debt consolidation Conventional Refinance
You can use a Conventional Loan to do a Cash Out transaction. As of the date of this post 11/2011, you can take up to 80% of the home’s value on a primary home. For Second Homes and Investment Home transaction, the loan to value is less depending on a few factors such as number of units and occupancy.
Cash out can be used for home improvement, debt consolidation, college financing, and more.
Typically, the rates on Consumer Debt such as credit cards range 15-29%. Rates on Conventional Loans are much lower than that which means you will pay a fraction of the interest you would on a credit card.
- PMI can be Cancelled
Typically, a first time home buyer purchase their first home with minimal/low down payment resulting in having PMI. This could be using FHA or Conventional financing.
With Government loans such as FHA, you will pay PMI for a long time if not the life of the loan. In exchange, FHA loans offer low down payments, lower credit scores and higher debt to income ratios.
When you have 20% equity, you can refinance out of an FHA loan and into a Conventional loan to remove the PMI. If you were to refinance into an FHA loan, you’d still have PMI even with 20% equity, so a Conventional Home Loan is a much better option.
With home values increasing substantially over the last couple years, now is a great time to take advantage of a Conventional Loan and remove your PMI and possible get into a lower rate.
- Flexibilty to refinance out of your existing loan – regardless of the type of home loan you have
Many streamline refinance types require you to have a certain type of loan to use the program.
Conventional loans don’t limit you what kind of existing home loan you can payoff. These include the following:
- Option ARM
- Standalone second mortgage
- First and second mortgage combo
- Free and Clear properties
You can also payoff liens:
- Tax liens
- Energy Efficiency loans such as PACE/HERO/etc
There’s zero restrictions on what can be paid off as long as you qualify and you have the equity in the home.
- Delayed Financing – getting money back for a Cash Purchase
If you bought your house with cash, you can refinance immediately and pull your money back out. If you used any kind of financing, then you’d have to wait 6 months to do a cash out loan after the closing of your home purchase (as of 11/2021).
This delayed financing rule allows you to make a quick purchase using cash. Many buyers are using cash due to the market being so competitive. This can be done on a normal purchase or a foreclosure/short sale/etc. There’s no restrictions on what the circumstances are of the seller.
As mentioned above, if you did not buy the home with ALL cash, you will have to wait 6 months with a conventional loan. There might be other loans that let you take out the money earlier but typically the loans cost more and offer higher rates since they are not backed by Fannie Mae or Freddie Mac.
To meet the Delayed Financing guidelines, the following requirements have to be met:
- The cash used for the original purchase must be documented to your lender
- The new loan size may not exceed the property’s original purchase price
- The title report must be free of any financing
- You will have to provide a closing statement showing no loans were taken out at the time of the purchase
Is there a Conventional streamline refinance?
Streamline refinances are very popular since they typically cost less, are much quicker and forgo appraisal and inspection requirements.
As of 11/2021, there is no Conventional Streamline loans. However, Fannie Mae and Freddie Mac have drastically reduced some requirements making a conventional loan much easier. The main ones are less income documentation and also the 2 agencies have been issuing Appraisal Waivers for many homes especially for ones with lots of equity. This typically saves a borrower anywhere from $500-$750+ by not having to do an appraisal.
Reduced income documentation for a W2 employee might be limited to just 1 paystub and most recent W2. For self-employed borrowers, the requirement can be reduced from 2 years of Federal tax returns to just 1.
Maximum Loan to value (LTV)
Loan to value calculations vary depending on many factors such as occupancy type (owner occupied, second home, or investment home). Other factors include Credit Score, number of units, loan purpose and others. If you have any questions regarding your loan to value calculation, please feel free to reach out to us directly.
Fannie Mae and Freddie Mac allow higher loan to values for primary homes vs. investment homes. They also allow higher loan to value when you refinance just the balance vs. a cash out loan.
These requirements can change so it’s always best to check with us directly on current calculations.
Conventional refinance minimum credit score requirements
As of 11/2021, the minimum credit score for a conventional loan is 620. Some lenders will put an “overlay” on the rule and require a higher score such as 640. This is mainly because they might not like to take risk on lower scores and have additional exposure.
The higher the credit score, the better terms you can get. Conventional loans, unlike Government loans (FHA,VA,USDA), are very sensitive to credit score especially once you get below 680. Having lower credit score will limit you on the maximum loan to value, come with a higher rate, higher PMI and typically cost you more in closing costs.
PMI (Private mortgage insurance) for conventional refinances loans
Most government loans such as FHA,VA,USDA will have 2 forms of Mortgage Insurance. There is an upfront mortgage insurance premium that’s added to the loan along with a monthly fee. VA home loan is the only loan that does not have a monthly PMI fee even with 100% financing.
With a conventional loan, there is no upfront PMI fee, only monthly which is potentially cancelable unlike government loans mentioned above.
The rule of thumb is if you pay down your loan to 78% you can remove your PMI, or if you’re at 80% you can request your lender to obtain an appraisal. The appraisal fee is typically a cost paid up front by the borrower so there’s some risk involved. Make sure to do your research before wasting time on an appraisal to make sure you’re within range of getting a high enough value to meet the 80% loan to value requirement.
Cancelling your PMI on a conventional can be done without a refinance. However, many homeowners have taken advantage of refinancing into a lower rate AND removing PMI at the same time so it’s a great idea to check in with us first to maximize your savings benefit.
Conventional Loans Frequently Asked Questions
I have an FHA loan, is a conventional loan better than an FHA streamline?
Typically, it’s better to refinance into a conventional loans but there are a few factors to consider before the determination can be made so please check in with us first.
Will an ARM (adjustable rate mortgage) be a better option for me?
Interest rates for ARMs are lower than fixed rates and you have to assess your risk vs. reward. Factors to consider is how much extra you’ll save with an ARM vs. a fixed rate, how long do you plan on being in the house, what is your tolerance for an increased payment if you end up staying longer than expected and your ARM rates goes up after adjustment period, how solid is your exit strategy to sell the house or refinance into a fixed loan if your plans change.
What happens if my appraisal comes in lower than expected
If your appraisal comes in lower than expected, always check to see if there’s mistakes or oversights on the appraisal report. If there are mistakes or oversights, your lender can submit a rebuttal. Providing better comparable sales is typically not something that works since the appraiser being the professional, already picked the best comparables. If you’re not agreeing with the value because of your opinion of what other comps should have been used or adjustment amounts, you will typically not get anywhere. If you find material mistakes with the appraisal report, those will have to be addressed.
For example, if the appraiser put that you have a 3-bedroom house but it’s actually a 4 bedroom, you should be able to get more value. Incorrect square footage would also give value. Other items could include missed upgrades, lots size, adjustment for views.
Are all conventional refinances the same?
Conventional loans are all underwritten to the same guidelines of Fannie Mae or Freddie Mac. Lenders can put additional overlays on top of what the 2 agencies require. So, the broad answer is that yes, all lenders have the same conventional loans. However, the rates and fees are set specifically by each lender so always make sure to get another quote before committing to a pushy loan officer.
What do I need to do to start a Conventional refinance?
To start, please fill out the form on this page and someone from our office will reach out to you!