Everything you need to know about conventional home loans in Albuquerque, New Mexico and beyond.
Are you looking to buy a home in the Greater Albuquerque Area? One thing to consider is the type of home loan you may be qualified for. There are three common types of home loans offered to most buyers: FHA Loans, Conventional Loans, and VA Loans. Let’s talk about Conventional Loans.
A conventional loan is often considered the most secure loans available to home buyers because their loan-to-value ratios are often the lowest. These loans are not backed by a government office and are usually used by borrowers with good credit (scores of 620 and above). Stricter requirements like higher credit scores are in place because these loans are not backed by the government. In order to determine if the prospective buyer will be a good candidate for the loan, lenders often apply an aggressive evaluation of the buyers debt, income, credit score, and employment history.
One of the biggest advantages to buyers taking out a conventional mortgage loan is there is no upfront costs like mortgage insurance with a down payment of at least 20% of the home loan. Some other advantages include:
- Low Down Payment Options: While the 20% down is most often associated with a conventional loan, programs such as the HomeReady and Home Possible by Fannie Mae (the Federal National Mortgage Association or FNMA) and Freddy Mac (The Federal Home Loan Mortgage Corporation or FHLMC) down payments can be as low as 3% for qualified buyers. That means for a $250,000 home a buyer would have to put down $7,500. However, they would have to pay mortgage insurance up front and monthly. This goes away when the buyer pays down at least 80% of the home’s price (20% equity).
- Low Mortgage Interest Rates: Since conventional loan borrowers have to meet stricter financial requirements, mortgage interest rates are typically lower than that of an FHA loan. Low mortgage interest rates are entirely dependent on location, time, and credit score.
- Varied Housing Options: Much like a FHA loan, a variety of housing options exist for buyers. Individuals have a variety of different options to choose from including a single-family detached home, condominium, town home, multi-family home, and manufactured housing (as long as it is on a permanent foundation). New construction and houses that need rehabilitation are options as well.
- Primary (and Secondary) Residence: Unlike FHA loans, conventional loans do not require buyers to reside in the home as their primary residence. Buyers may use a conventional loan for an income property or a vacation home.
The downsides to this form of loan are connected to the overall requirements, they require a higher amount of money upfront to reap the benefit of no mortgage insurance, and they also require a higher credit score. Both of which many first time home buyers do not have.
- Higher Down Payment for No PMI: In order for buyers to avoid upfront and monthly costs associated with PMI they have to put down a minimum of 20% of the home’s cost. So for a home loan of $250,000 a buyer would have to put down at least $50,000 in order to avoid mortgage insurance.
- Strict Application Requirements: Individuals applying for a conventional loans typically go through stricter requirements in order to obtain the loan. This includes a minimum credit score of 620, low debt to income ratio, and stable employment.
- Loan Limits: Just like an FHA loan, there is a cap to how much a conventional loan will cover. Every year the Federal Housing Finance Agency (FHFA) releases the maximum loan limit for loans that are sold to Fannie Mae and Freddy Mac. These loan amounts are determined by county and cost of living. So, for high-cost areas the loan amount is higher. In Albuquerque, the conventional loan limit is $510,400 for a single family residence.
If you would like more information on conventional loans or need help getting financed and/or starting the loan application process when purchasing a home, contact me today.
Elizabeth Benedict is an Associate Broker and REALTOR® at ERA Sellers and Buyers Real Estate in Albuquerque, New Mexico. She holds a Masters in Literature from the University of New Mexico. When she is not helping her community buy and sell houses she is usually writing.