How Conventional Loans and Refinancing Work

Conventional & USDA Loans

Learn More About Different Types Of Loans

According to the Home Buyer and Seller Generational Trends report, more than half of all home buyers — 59% to be exact — chose conventional mortgages when they needed home loans. Many of those homeowners will refinance their conventional loans at some point, as well. So, exactly what is a conventional loan and what does it mean to refinance one? Here’s an explanation of each and how they can work for you.

What are conventional home loans?

A conventional home loan is one that isn’t backed by a government agency, such as the Federal Housing Administration (FHA), Department of Veteran Affairs (VA), or the Farmers Home Administration (FmHA). Conventional loans meet the income and down payment requirements that are set by Fannie Mae and Freddie Mac, and can be 15, 20, or 30 years long. Borrowers who put down at least 20% of the home’s purchase price don’t have to pay for mortgage insurance, while a smaller down payment or a government-backed loan does require it.

Are you eligible for a conventional home loan?

Conventional loans can be a bigger risk for lenders, so they tend to have tougher requirements. Borrowers should have good financial standing, a credit score of at least 620 to 640, and a decent-sized down payment. However, if you have a higher credit score, you might be able to make a lower down payment. You may even be able to get a better rate if you have a higher credit score.

What are the benefits of conventional home loans?

If you meet the requirements for a conventional mortgage, making a larger down payment will mean smaller monthly payments. Private mortgage insurance premiums may be lower on a conventional loan and you can even cancel the insurance once the principal balance drops to 78% of the home’s value. (Remember that a down payment of 20% will mean that you don’t need mortgage insurance to begin with.)

What does it mean to refinance a conventional home loan?

Refinancing a conventional loan means that you will replace your existing loan with a new one. People tend to refinance if they want a lower monthly payment, to get a lower interest rate, to get a fixed-rate loan, to get cash from home equity, to pay down debt, to reduce the length of the loan, or to remove private mortgage insurance.

This basic overview of conventional loans and refinancing should allow you to feel a bit more confident going into any meeting with a lender or when looking at available homes on the market. To learn more about obtaining a home loan or refinancing your current loan, please contact us today.

USDA loans are a great option for people in rural areas, especially those with less income.

Figuring out if you’re eligible for a USDA (US Department of Agriculture) loan through the USDA’s official site is unfortunately somewhat difficult, so in this article we’re making it simple.

There are a two main types of USDA home loan for individuals, so we’ll take them one at a time:

Single family housing guaranteed loan program

When you hear about USDA loans, most of the time this is the program that people are talking about. It is designed to help low to middle income people in rural areas “to own adequate, modest, decent, safe and sanitary dwellings,” according to the USDA. These loans can be used to repair or relocate a dwelling as well as to purchase a home.

These loans are guaranteed by the USDA – which means that the lender can take greater risks than they otherwise would in offering generous loans to applicants, secure in the knowledge that the government will pay them back for up to 90% of the loan value, even if the applicant cannot.

To apply:

You must live in an eligible area. (This link will direct you to a map of eligible areas in the United States)
You must meet income eligibility requirements for the loan. These are different depending on the county, but are outlined here. For Shasta County, income requirements for a single person range from 30,900 dollars per year to 78,200 dollars per year.
You must agree to personally use/occupy the purchased dwelling as a primary residence.
Applicants must be US citizens, non-citizen nationals, or Qualified Aliens.
Applicants must have the“legal capacity to incur loan obligation.” What this means is simply that the applicant must be of legal age and sound mind, or have a court-appointed guardian who may act as an intermediary.
You must not ever have been disbarred or suspended from a federal program.
You must “demonstrate a willingness” to meet credit obligations by deadlines. If you can show that your loan payments (or similar payments) have been on time in the past you will meet this requirement. Best to bring any financial records that might be pertinent when speaking with your lender.

This covers the most common type of USDA loan, at least for home buyers in Shasta County. However, it is also important to cover the other main type of USDA loan for individuals.

Single family housing direct home loans

Unlike the guaranteed loan program, this is designed for low and very-low income individuals only. It is somewhat easier to qualify for, though there are restrictions on the type of property that may be purchased with a loan of this type.

For instance, properties procured through single family housing direct home loans must not:

Be greater than 2,000 square feet in area
Have a greater market value than the applicable loan limit
Not be designed for “income producing activities.” If you intend to use your home as an office or a storefront, this loan may not work for you.

On the other hand, there are no income requirements for these loans, as they are designed specifically to help the poor. You must only be without non-hazardous housing, and be unable to procure a loan from another source. In addition, borrowers must have legal capacity, citizenship, and have a clean record with regard to disbarments and suspensions from federal programs.

Overall, this is a highly generous loan for rural areas, and is a godsend for lower-income individuals.

Many areas of Shasta County are eligible for USDA loans! If you’re interested, you can read more about those loans here. Or, call Megastar Redding at (530) 999-9000 with any questions.

MEGASTAR FINANCIAL CORP. is an Equal Housing Lender. DBO Lic # 603 G365 NMLS Lic # 235828(3043)*
Licensed by the Department of Business Oversight (DBO) under the California Finance Lenders Act * NMLS # 1162668.
As prohibited by federal law, we do not engage in business practices that discriminate on the basis of race, color, religion, national origin, sex, sexual preference, marital status, age (provided you have the capacity to enter into a binding contract), because all or part of your income may be derived from any public assistance program, or because you have, in good faith, exercised any right under the Consumer Credit Protection Act. We are regulated by the Fair Housing Act (overseen by HUD) and the Equal Credit Opportunity Act (overseen by CFPB), Washington, DC, 20580.

Loan scenario:

Example of 30 year mortgage:
$300,000 sales price, $60,000 down payment, $240,000 loan amount, 360 months, 3% interest rate, 3.132% APR, $1,029 Principle and Interest monthly payments, Payment does not include taxes, insurance premiums or HOA dues. The actual payment amount will be greater. Rates shown valid on publication date of June 29th, 2020. This example is for a conventional, not jumbo, mortgage product; there are restrictive upper loan amounts for conventional loans based on the property’s location. Example given requires a minimum 740 credit score with a debt to income ratio of under 45%. Applicant must be employed. This is not a promise to lend. All terms and conditions are based on the subject property, the applicant’s credit worthiness and the applicant’s ability to repay the loan.
15-Year Fixed-Rate Mortgage:
The payment on a $300,000 15-year fixed-rate loan at 2.723% and 80% loan-to-value ratio (LTV) is $1,626. The annual percentage rate (APR) is 3.178%. Payment does not include taxes and insurance premiums. The actual payment amount will be greater. Rates shown valid on publication date of June 29th, 2020. This example is for a conventional, not jumbo, mortgage product; there are restrictive upper loan amounts for conventional loans based on the property’s location. Example given requires a minimum 740 credit score with a debt to income ratio of under 45%. Applicant must be employed. This is not a promise to lend. All terms and conditions are based on the subject property, the applicant’s credit worthiness and the applicant’s ability to repay the loan.

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