Getting Started with Denver Conventional Home Loans

Homebuyers who have good credit scores can afford regular payments and can make a substantial down payment on their new property benefit the most from a conventional mortgage. They can also use a conventional loan in the purchase of a second home or investment property, which they can’t do with an FHA loan.

What is a Conventional Home Loan?

A conventional home loan is backed by private lenders, such as banks and credit unions. It’s then sold to government-sponsored private companies, such as Fannie Mae and Freddie Mac.

The primary difference between a conventional loan and a federally backed (FHA) loan is the source of funding. Private investors fund and back conventional loans. Because private funders assume more risk in conventional loans, they have stricter eligibility requirements.

How Do Conventional Loans Work?

When a prospective buyer decides to take on a conventional loan, applying is the first step. The buyer submits several documents outlining their current financial status, credit score, proof of employment or income, assets, and liabilities.

The lender then gathers title reports on the property to verify there are no liens against it and schedules a real estate appraisal to establish the home’s market value. After these steps, the lender makes a final determination whether they’ll underwrite the loan.

If the lender accepts the application, the closing process begins, and both parties sign mountains of paperwork. A closing agent double-checks the documentation to ensure the process was followed correctly. The sale then closes, and the loan is funded, usually within a few days.

What Factors Determine the Interest Rate for Denver Conventional Home Loans?

The most significant factor in establishing an interest rate is the borrower’s financial stability. The better off they are, the lower their interest rate will be. Specific terms of the loan agreement also influence the interest rate: the loan amount, the length of the repayment period, and whether the rate is fixed for the life of the loan or is adjustable.

But several external factors affect interest rates, elements which neither the homebuyer nor the lender can control. These include:

Inflation. Most lending agreements are repayable over lengthy periods, usually 15 or 30 years. The cost of living and material goods usually increases over the life of the loan. Lenders have to charge interest rates that ensure they’ll still make a profit when the value of the dollar decreases.

Economic climate. When the economy’s going well — unemployment is down, and the gross national product is up — people buy more property and apply for more home loans. Interest rates then go up: more people want loans, but lenders have less money available. When the economy is doing poorly, the opposite is true. Fewer people are buying homes, and lenders have to make interest rates low to attract potential homebuyers.

Financial markets. When the bond market is healthy and bond prices are higher, interest rates tend to be lower. The inverse is also true: Lower bond prices result in higher interest rates. Real estate interest rates generally follow the patterns of bond interest rates, going up or down accordingly.

Housing market conditions. A robust housing or construction market usually results in higher interest rates — there’s more demand, and buyers are willing to pay more. When new home construction stalls, the real estate market slows down, or more people choose to rent their homes instead of buying, interest rates usually decline with the lack of demand.

What Factors Determine Your Eligibility for Denver Conventional Home Loans?

To obtain a conventional home loan, a buyer must meet a few requirements:

Conventional home loans are generally available only to those with a credit score of 680 or more.

The percentage of one’s monthly gross income that’s used for repaying debts must be relatively low. Most lenders prefer debt-to-income ratios of 36% or lower, with no more than 28% allotted for mortgage debts. Some lenders offer restricted mortgages for debt-to-income ratios between 37% and 43%.

Lenders require that borrowers have established and consistent employment for a given amount of time before obtaining a loan. Pay stubs and financial records are solicited to verify employment.

Your current level of income — also verified by pay stubs — and a comprehensive list of your assets and liabilities must be approved.

 For a conventional loan, borrowers must be able to afford a down payment of 3% toward the purchase of their property. If they can pay 20% or more, they’ll typically avoid having to pay private mortgage insurance on the loan.

The type of home one wishes to purchase also determines acceptance for a conventional loan. If the house’s value exceeds $500,000, a conventional loan is usually the only lending agreement available to a potential buyer. Those buying a second home or a property for investment purposes (as opposed to their own residence) also must take out a conventional loan.

Advantages of a Conventional Home Loan

Lower interest rates. If the buyer can afford a higher down payment on their house, the lender may offer a significantly lower interest rate. Even if they can’t, they’re liable to save money on the fees that are levied on federal loans.

 

Higher or no loan limits. Technically, conventional home loans can be issued for any amount, no matter how much. Some lenders that offer conforming conventional loans do have maximum loan amounts, but they’re generally higher than the $500,000 limit of federal mortgage loans.

 

Quicker processing. The paperwork involved with conventional home loans is less than what federally backed loans entail. Conventional mortgage loans also don’t have to deal with the delays and inspection process of a federal loan.

Lower or no mortgage insurance premiums. Most conventional borrowers pay less for mortgage insurance premiums. If the homebuyer can afford a down payment of 20% or more, they likely won’t be required to pay any mortgage insurance at all.

More eligible property types. Conventional loans can be used to buy second homes, investment properties, or homes over $500,000 in value. Federal loans cannot be used for any of those situations.

More flexibility. Conventional loan borrowers can choose the length of their loan. They can opt for fixed or adjustable interest rates for the life of the loan. They may also be able to refinance their mortgage if they choose.

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In Addition to these standard loan programs we offer a large number of specialized loans to fit your needs.