When buying a home, you will have a number of conventional loan options to choose from to finance the purchase. For example, you can apply for a traditional home loan from a mortgage lender where you need to meet certain criteria before you can qualify for the loan. Or, you can take out a conventional Fannie Mae loan, which offers more flexibility than many other loan types.
Whichever financing solution you choose, there is one customary requisite that all lenders will ask for—an interest rate. They charge interest rates to cover the cost of providing you with funds, and these rates can vary depending on a number of factors.
In this article, we will help you have a better understanding of conventional home loan rates so that you can get the best deals when taking out a mortgage for your home purchase. So, read on!
Conventional Loan Rates Explained
When you apply for a conventional loan, your interest rate will be based on a number of different factors. These include your credit history and score, income level, down payment amount, and debt-to-income (DTI) ratio. Generally speaking, those with higher credit scores and lower DTI ratios will qualify for lower interest rates than those with lower credit scores or higher DTIs.
The type of loan you choose can also affect your interest rate. For example, if you take out a 15-year fixed loan, you will likely have a lower interest rate than if you took out an adjustable-rate mortgage (ARM).
In addition to these factors, lenders may also look at the loan amount and the equity in the property. The higher the loan amount and/or the more equity you have, the lower your interest rate will be.
How Are Conventional Mortgage Rates Calculated?
Lenders will generally use an index rate to calculate conventional mortgage rates. This is the average interest rate of all loans sold by lenders in a particular market. These include loans with different terms, such as ARMs and fixed-rate mortgages.
Lenders will then add a margin (also known as “markup” or “spread”) to the index rate. This additional percentage will depend on the factors that are mentioned above.
The end result is your mortgage rate—the actual interest rate you will pay on your loan.
A Quick Guide to Getting a Fannie Mae Loan for a Home Purchase
As previously implied, a conventional Fannie Mae loan offers more flexibility than other loan types. You can use it to purchase a primary or second home or even an investment property. It is important to remember, however, that while these loans are slightly easier to qualify for, they do still require certain criteria in order to be approved.
- You will need a good credit score. For Fannie Mae loans, it should be at least 620 (or higher) and no recent derogatory marks on your credit history. You should also have sufficient income to cover the proposed mortgage payment as well as any other existing debts you may have.
- Lenders usually like to see that borrowers have some amount of money saved up for their down payment. This can vary from 3-20% depending on the type of loan you are applying for.
- You need to show proof of having cash reserves for months’ worth of mortgage payments.
- You should also have a DTI ratio of less than 45%. This means that your total monthly debts, including the proposed mortgage payment, should not exceed 45% of your gross income per month. If it is higher than this, you may be asked to pay more money down or otherwise increase your loan amount in order to qualify.
- As of the start of 2023, the maximum conforming loan limit is $726,200. This means that you cannot take out a loan for more than this amount.
- Generally, you pay for a home appraisal fee, but you may be allowed to have a property inspection waiver (PIW), which is unique to Fannie Mae loans.
- An evaluation of the property’s title history may be needed to ensure it is free of ownership claims from previous owners.
To ensure full compliance with Fannie Mae’s loan guidelines, it is recommended that you work with a reputable mortgage broker. You will have a conventional Fannie Mae loan explained here more in detail, so you can make an informed decision on the best course of action for your home purchase.
Ways to Get the Best Rates for a Conventional Home Loan
Now that you have a better understanding of conventional mortgage interest rates and some information about taking out a Fannie Mae loan, here are some tips to help you get the best possible rate.
1. Make Sure Your Credit Score Is as High as It Can Be
Your credit score is one of the most important factors in determining your mortgage rate. The higher it is, the more attractive you will be to lenders and the better rates they will be willing to offer you.
If you find any errors in your credit report, be sure to dispute them so they do not drag your score down. You can also work on paying off any debt you have and make sure to pay all of your bills on time, as this will improve your creditworthiness.
2. Offer to Make a Larger Down Payment
The more money you can put down upfront, the lower your mortgage rate will be. Lenders tend to view larger down payments as a sign of trustworthiness and are usually willing to offer better rates in exchange for it.
Also, a larger down payment would make the loan term shorter, which could lessen the overall cost of paying off the loan.
3. Prove That You Have Stable Employment and Income
Having a stable job and income will give lenders the assurance that you will be able to make the payments on time. Show them your pay stubs and other documents that prove your employment status and income level.
4. Determine Your DTI Ratio
The highest DTI ratio limit for you to get approved for a loan would be 43%, but this could also mean higher interest rates for the conventional home loan you get. To enjoy lower rates, it would be best if your DTI ratio is not more than 36%. This means that you have enough income to cover your debts and any other expenses you may have.
So, if you have any existing financial obligations, such as credit card debts, try to pay them off before you apply for a loan and keep your DTI ratio as low as possible.
5. Consider Alternative Loan Terms
When you apply for a conventional home loan, lenders may offer you various options. You can choose to pay higher interest rates in exchange for a smaller down payment or opt for an adjustable-rate mortgage (ARM) if you plan on living in the property only for a few years.
Alternatively, you can take out an interest-only loan and pay only the interest portion of your monthly payments until the end of the term.
6. Buy Mortgage Points
Mortgage points are a privilege offered by lenders that allows you to pay a fee to lower your interest rates. In a sense, you are buying down the rate and paying upfront.
For example, you can pay two points, which is equal to 2% of the total loan amount, to reduce your rate. While it may seem costly at first glance, mortgage points are something to consider if you plan on staying in your home for a long time as the money you save in interest payments over the life of the loan could be worth more than what you paid initially.
7. Take Advantage of the Rate Lock System
Some lenders offer a lock system, where you can commit to them at the current rate for a certain amount of time, and they will guarantee it will not go up. This could be beneficial if you find a great rate but need more time to close the loan.
However, this also means that if rates drop during this period, you will not get the lower rate unless you pay extra for the privilege. Be sure to weigh your options carefully before deciding whether or not to use this option.
8. Consider Mortgage Refinancing
If you have an existing mortgage, you can refinance it and get a lower rate. This could mean shorter terms or lower monthly payments, depending on your current loan situation.
Mortgage refinancing is also something to consider if you want to switch from an ARM to a fixed-rate mortgage or vice versa. Just make sure that the new loan works for your financial needs and goals before making any decisions.
9. Look for Balance Transfer Opportunities
When taking out a conventional home loan, some lenders would offer borrowers to transfer their remaining balance to another lender or credit institution. This is called a balance transfer.
This strategy is good if you already have an existing loan, and the lender is offering to transfer the remaining balance at a lower rate.
There is just one catch—you might need to pay a fee for the transfer. So, know how much the fee will be and make sure it does not outweigh the savings that you could have if you continue paying your current interests.
10. Choose a Loan with a Floating Interest Rate
Having this type of interest rate means that the lender can adjust your rate to match the current market demand. This could be beneficial if you can take advantage of lower rates when they are available.
But again, the risk with a floating interest rate is that your monthly payments could increase significantly if the market rate goes up. So, make sure you can afford potential fluctuations before signing up for a loan with this type of rate.
11. Find Out If You Are Eligible for First-Time Home Buyer Programs
Some states have first-time home buyer programs that offer attractive interest rates and make home ownership more affordable. Make sure you do your research and find out if you are eligible to apply for one when taking out a conventional loan.
12. Negotiate with the Lender
Perhaps, the quickest way to get the best deal on your home loan is by negotiating with the lender directly for a lower rate. This could potentially save you hundreds of dollars each month, so make sure to ask about it before signing any paperwork.
As you can see, there are many ways to get the best deals on the interest rate for a home loan. So, do your research and check with the lender if you can apply them to get the most savings!
What Is Conditional Approval in a Mortgage Application
In some situations, it may take several weeks or even months for your conventional mortgage loan application to be processed and approved by a lender. During this time, you may receive conditional approval from the lender.
This means that the loan can still be approved if certain conditions are met within a predetermined timeframe. These conditions could include providing additional documentation about your income and financial situation or establishing employment with a certain company.
If all of the conditions are met before the deadline, then your mortgage loan will be approved in full. If not, then you may need to reapply or look into other financing options available to you.
If you find yourself in this situation, it is best to seek help from real estate and financial experts. From them, you can gather brilliant tips for a successful conditional approval and a smooth mortgage loan process.
Final Thoughts on Conventional Home Loan Rates
Whether you are applying for a mortgage with a traditional lender or taking out a conventional Fannie Mae loan, getting the best deal on the interest rate is always a good idea. By taking advantage of all the tips and strategies mentioned in this article, you can save more money over time and make your home ownership dreams a reality.
For more tips and information that you can use when buying homes, feel free to check out our other blog posts!