Traditional Mortgage Loans


 Traditional Mortgage Loans

Traditional mortgage loans, also called “conventional” loans, are the most conservative of mortgage products. They have established guidelines for borrowers’ credit scores, incomes, and minimum down payments. For example, a lender may require a credit score between 620 and 740 to make a conventional loan, sufficient income to pay the mortgage amount applied for, and a down payment of between 5 and 20 percent.

Conventional loans typically present fewer bureaucratic snags than nontraditional mortgage products. As a result, closing usually takes place sooner than with nontraditional loans. The market for this type of product includes buyers with excellent credit and a ready down payment.

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Fixed Rates

A traditional mortgage, in its purest form, is a fixed-rate instrument. This product allows borrowers to lock in their interest rate. Most fixed-rate loans are for terms of 15 or 30 years. However, the term can be any length of time that the lender and borrower agree upon, perhaps 15 or even 40 years. Generally, the shorter the term, the lower the interest rate.

Under the terms of a fixed-rate loan, the loan payment is the same each month for the life of the loan. If it is important for a buyer to be able to budget exactly his or her mortgage obligation over the long term, a fixed-rate loan is a very dependable product. Fixed-rate loans are also attractive to home buyers purchasing in a low interest rate environment.

Cost Of Traditional Mortgage Loans

Several costs are incurred with traditional loans, explained next.

Origination Fees

Origination fees are upfront charges for making a loan. They serve as compensation for putting the loan in place. Origination fees cover processing the application, underwriting, funding, and other administrative services.

Private Mortgage Insurance

Private mortgage insurance (PMI) is distinguished from the mortgage insurance associated with FHA and Veterans Administration loans. Private mortgage insurance is purchased in the private sector to protect the lender if the borrower defaults.

PMI is generally required under a conventional loan—and most loans—when the borrower makes a down payment that is less than 20 percent of the appraised value of the home. Premiums are paid monthly until the loan-to-value (LTV) ratio reaches 80 percent. The LTV is calculated by dividing the loan amount by the value of the collateral used for the loan.

In order to eliminate PMI, lenders require an approved appraiser to conduct an appraisal of the property.

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