A conventional loan offers low rates, few fees, and an easy approval process. Through home finance history, conventional loans have been the first choice for most people buying or refinancing property.
While FHA and VA loans have made serious inroads in the market in recent years, conventional loans still make up 65% of all new loans in the U.S. Now there’s solid evidence that a conventional loan is more likely to be completed start to finish than any other loan type.
Mortgage software maker Ellie Mae publishes their Origination Insight Report each month, which aggregates data from one out of every three mortgage loans in the U.S. Their most recent report showed that in June 2014, nearly 62% of conventional loans were approved and funded (i.e. closed) within 90 days of application. Conventional loans were more likely to close than FHA and VA loans, whose closing percentages were 57% and 58% respectively.
Those in the market for a conventional mortgage are having greater success than other applicants. It could be time for more mortgage shoppers to consider a conventional mortgage.
Success Rate even Better than Report Suggests
The report says that around 60% of all mortgage loan applications are seen through to completion. But that does not mean that 40% of all borrowers are denied. These figures do not factor in shopping around.
Many borrowers start an application at one lender, but decide on a different lender because of lower rates or closing costs. The borrower’s initial loan application is not completed, but their subsequent one is. Thus, a much higher percentage of borrowers ultimately receive approvals than the data suggests.
Conventional Loans now Easier to Close
A conventional loan is simply one that conforms to Fannie Mae and Freddie mac standards. This is why these loans are often called conforming loans. But conventional loans are not quite a straightforward as one might think.
Lenders typically don’t approve conventional loan applications strictly by the set of rules published by Fannie and Freddie. Instead they impose “overlays” – additional rules that make their loans safer, as they see it. That’s why many mortgage shoppers are denied at one bank and approved at another, even though they are applying for the same loan type.
Think of banks like fishermen with nets. One fisherman catches a lot of fish because he has a better net. Another fisherman loses fish because his net isn’t made for a certain kind of fish. Lenders with a guidelines that suit today’s borrowers have a better net and catch more fish.
Many lenders now realize that their nets are not working and eliminate overlays. As a result, conventional loan applicants are having greater success. According to the Mortgage Credit Availability Index, or MCAI, mortgage credit is 16% more available than it was in March 2012. Each week, lenders allow lower credit score minimums, higher loan-to-value ratios, and better terms and are finally approaching the standards allowed by Fannie and Freddie.
Conventional Mortgage Products: Better Overall Value
About two thirds of all mortgage consumers use conventional loans. Why do those looking to buy or refinance property overwhelmingly turn to the conventional loan program? It is a better value than its government-sponsored counterparts.
Government-backed loans have their advantages. They often allow lower credit scores and easier down payment requirements. For some borrowers looking to get into their first home on a tight budget, an FHA loan or USDA home loan is perfect.
But with the greater leniency comes higher cost. FHA loans require a hefty 1.75% upfront fee — $1,750 for every $100,000 borrowed. With mortgage insurance costs, an applicant taking out a $350,000 FHA loan will pay $11,000 more in fees during the first year than with conventional.
Likewise, USDA and VA loans require extra fees. Conventional loans never require an upfront fee, and mortgage insurance is about half that of FHA MIP, and is only needed when equity is less than 20%.
Getting a conventional loan is a little like being approved for a low-rate credit card. Cost breaks pass to the borrower because there’s lower risk to the lender.
Those who can qualify for a conventional loan should consider the benefits over FHA. In the first few years of the loan, these borrowers will notice significant savings.
Conventional Mortgage Rates
Conventional loan rates are at historic lows and have been dropping all year. Those in the market to purchase or refinance property should consider locking in before rates rise. Mortgage rates typically hold steady or drop gradually for over an extended period, then rise dramatically and quickly. Rate shoppers who have not locked at that point typically have to settle for a higher rate, or pay thousands for a lower one.
Check conventional rates and eligibility. Lock in the low rates that are available now.