Conventional Loans

Conventional Loan Basics

What is a conventional loan?

When most people think about getting a mortgage, they’re thinking about a conventional loan – and for good reason. Conventional loans are the most popular type of mortgage in the U.S. and is a mortgage not backed by the government. Conventional loans are offered by private lenders – such as banks, credit unions, and mortgage companies like RoundPoint! They are typically conforming loans, meaning they meet guidelines set by Fannie Mae and Freddie Mac. 

Whether you are buying your first home, upgrading to something bigger, or refinancing your current loan to get a better rate, conventional loans are often the go-to option for borrowers who have good credit, steady income, and a down payment saved up. Keep reading to understand how a conventional loan works, who its best for, and why it might be a great fit for your homeownership journey. Or start speaking with one of our Loan Officers to explore your options!

What are some advantages of conventional loans?

Key benefits of a conventional loan include:

• Flexible loan terms: Choose a fixed or adjustable rate option with repayment terms from 15 to 30 years.
• Down payment options: There are a variety of options that allows homebuyers to pay as little as 3% down. However, putting down 20% or more eliminates the need for private mortgage insurance (PMI). We can even help you explore down payment options and assistance in your area.
• Competitive interest rates: The better your credit score, the more competitive your rate!
• Private mortgage insurance (PMI): If your down payment is less than 20%, you’ll likely need to pay PMI. The good news? PMI can often be canceled once your home equity reaches 20%.
• Variety of property types: Conventional loans can also be used to finance a variety of property types including single-family homes, townhomes, condominiums, and investment properties. 

What kind of conventional loans exist?

There are two main types of conventional loans:

• Conforming: Mortgages that adhere to guidelines set by the Federal Housing Finance Agency (FHFA). These loans are backed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), two government-sponsored organizations.
• Non-Conforming: Mortgages that do not meet the standards and guidelines set by the Federal Housing Finance Agency (FHFA) to be insured by Fannie Mae or Freddie Mac (i.e., jumbo loans). 

For added convenience, both conventional loan types are available with fixed- or adjustable-rate options, as well as a variety of term lengths.

A common misconception is that conventional loans are harder to get. Don’t fall into the trap of thinking a conventional loan is out of reach! Let one of our Loan Officers guide you through this process – you will be surprised at how many options may be available to you.

How do I qualify for a conforming conventional loan?

As you begin your homebuying journey, it is important to understand what lenders typically look for when evaluating your application. For conforming loans, some of the basic conventional loan qualifications include:

• Good credit: A credit score of at least 620 or higher is required in most instances.
• Manageable debt: A debt-to-income ratio (DTI) less than 43% is typically required.
• Down payment funds: Homebuyers must have a minimum down payment of at least 3-5%.
• Steady income: Stable income and employment history, including supporting documentation like tax returns, bank statements, and pay stubs.

Consult our Loan Officers to take the guesswork out of understanding your credentials and paperwork!

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Jumbo Loan Basics

What is a jumbo loan?

At RoundPoint, we understand your dream home may not fit into the standard mortgage box, which is why we are happy to offer jumbo loans. A jumbo loan is a non-conforming conventional loan designed for higher value properties.

Jumbo loans allow you to purchase more expensive homes for various property types including primary residences, vacation homes, or investment properties. Just like our conforming loan options, RoundPoint offers flexible terms and competitive rates for our jumbo loan solutions.

How do I qualify for a jumbo loan?

Think a more expensive property is out of your reach? Making your dream home a reality is lot easier than you may think. For non-conforming jumbo loans, some of the basic conventional loan qualifications include:

• Great credit: A credit score of at least 700 or higher is required in most instances.
• Manageable debt: A debt-to-income ratio (DTI) less than 43% is generally considered the most desirable.
• Larger down payment: The larger the down payment, the easier it is to qualify and avoid higher interest rates.
• Sufficient cash reserves: Homebuyers must have significant cash reserves available to demonstrate their ability to comfortably manage their mortgage payments.

Speak with our Loan Officers to determine if a jumbo loan is the best option for your homebuying goals.

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Adjustable-Rate Mortgages (ARM)

What is an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) is a mortgage loan with an interest rate that changes over time. There is an initial fixed-rate period, followed by an adjustment period where the interest rate adjusts periodically. 

Since ARM loans typically begin with a lower interest rate compared to their fixed-rate counterpart, they are an excellent option for homebuyers that value short-term savings and increased flexibility. Let RoundPoint help you understand the benefits of adjustable-rate mortgages and how they can strategically fit into your financial goals.

What are the benefits of an adjustable-rate mortgage (ARM)?

Key advantages of an adjustable-rate mortgage (ARM) include:

• Lower initial interest rate: Compared to fixed-rate mortgages, the rate during the initial period is often significantly lower.
• Potential for rate drops: Unlike fixed-rate loans, ARM loans can adjust downward. If an interest rate drops, your monthly payment could decrease!
• Built-in rate adjustment limits: No need to worry about rising rates – most ARM loans include rate caps that limit how much your rate can increase, not only during each adjustment period but over the life of the loan. 

The lower upfront costs and flexibility makes adjustable-rate mortgages great options for first-time homebuyers, investors, and those looking to purchase a second home.

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Fixed-Rate Mortgages

What is a fixed-rate mortgage?

A fixed-rate mortgage is a mortgage loan with an interest rate that remains the same throughout the entire loan term. Fixed-rate mortgages have terms of 15, 20, or 30 years (30-year terms are the most common). 

Since your monthly principal and interest amount will never change, a fixed-rate mortgage makes it even easier to plan for your future. Call our Loan Officers to discuss the stability of a fixed-rate mortgage!

What are the benefits of a fixed-rate mortgage?

• Predictable payments: Your monthly principal and interest amount stays the same month after month, for the life of the loan, making long-term budgeting easier.
• Protection from rising rates: If interest rates rise in the future, you will have peace of mind knowing you locked into your rate at the time of signing.
• Savings and equity growth: Consistent payments contribute to steady equity growth!

Fixed-rate mortgages are an excellent choice for homebuyers seeking long-term homeownership stability. At RoundPoint, we look forward to helping you secure the best fixed-rate mortgage for a worry-free loan structure!

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Comparing Your Rates & Terms

Fixed Rate vs. Adjustable Rate

30-Year Fixed-Rate Mortgage vs. 15-Year Fixed-Rate Mortgage

Deciding between two popular loan term lengths is about a lot more than interest rate and payment. It is important to consider your current financial situation as well as your future goals. Talk with one of our Loan Officers to ensure you select the best mortgage term to set yourself up for success! 

A 15-year fixed-rate mortgage will result in a higher mortgage payment amount compared to a 30-year fixed-rate mortgage; however, the 15-year fixed-rate mortgage option qualifies borrowers for a lower interest rate.

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Private Mortgage Insurance (PMI)

Is private mortgage insurance (PMI) required for conventional loans?

Private mortgage insurance (PMI) is required for conventional loans when the loan-to-value (LTV) ratio is above 80%. If you want to avoid paying for PMI, you would need a down payment of at least 20%.

If you cannot afford a 20% down payment, do not let this discourage you. Once you achieve 20% equity (meaning your loan balance reaches 80% of the original value), you can request cancellation of the PMI. Additionally, lenders are legally required to cancel private mortgage insurance once your loan balance reaches 78% of the original value. Think of it as a short-term additional cost to attain homeownership sooner! RoundPoint strives to take the guesswork out of the mortgage application process – don’t hesitate to contact us to further discuss your options.

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Fees & Costs

What fees and costs are associated with mortgages?

Whether you are buying a new home or refinancing an existing mortgage, you may be surprised by the fees and costs involved. Some of these charges can significantly impact your monthly payment amount and the total cost of the loan, so it is important to understand what you are paying for and why.

Let’s look at some common fees and costs associated with a mortgage:

• Origination fee: Typically anywhere from $0-$995, this fee is charged by lenders for processing your loan.
• Appraisal fee: Appraisal fees, ranging from $0-$2000, cover the cost of a professional property appraisal.
• Credit report fee: This fee is paid to pull your credit report.
• Escrow costs: These costs are related to property taxes and insurance payments.
• Recording fees: Local government requires payment to register your mortgage. This cost generally ranges from $0-$500.

How can I lower my mortgage costs and fees?

While many costs are considered standard, some are negotiable or can be avoided completely. Here are a few strategies that may reduce or eliminate your costs:

• Compare lenders: Fees are not the same for all mortgage lenders. Compare loan estimates from multiple lenders to determine the most competitive option.
• Credit score: Improving your credit score may qualify you for lower interest rates or overall fees.
• Ask about waivers and discounts: Based on your credit score or loan type, you may be eligible for fee reductions or waivers. It never hurts to ask!

At RoundPoint, we believe in transparency and affordability. Let us help you feel empowered and prepared when making financial decisions during your homeownership journey!

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Mortgage Loan Types At a Glance

Type	Conventional	FHA	Jumbo
Minimum Credit Score	620	500	700
Terms	15-30 Years	15-30 Years	15-30 Years
Minimum Down Payment	3-20%	3.5-20%	5-30%
Maximum Debt-to-Income (DTI) Ratio	50%	43%	43%
Fixed or ARM?	Fixed & ARM available	Fixed & ARM available	Fixed & ARM available
Best For	Homebuyers with good credit and the ability to make a larger down payment.	Homebuyers with lower or limited credit, first-time homebuyers, and/or those with less funds available for a down payment.	Homebuyers with stronger credit looking to purchase a more expensive primary residence, second home, or investment property, as well as the ability to make a significant down payment.