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California Conventional and Conforming Home Loans

By Joseph Hendizadeh

If you're in the market for a home loan, one of the types of loans you will probably be looking at is a conventional home loan. Conventional home loans differ from those that are guaranteed or insured by the federal government, such as FHA (Federal Housing Administration), VA (Veterans Administration), or the RHA (Rural Housing Service).

It wasn't too long ago that the only type of home loan you could get was a conventional home loan. Today, these are still among the most commonly used loans for those looking to buy a home.

There are several different types of conventional loans. Perhaps the most common of these is the fixed rate mortgage.

With a fixed-rate mortgage, you get the loan at a certain interest-rate; for the life of that loan, the interest-rate never changes. Commonly, fixed-rate mortgages are available with 15 or 30-year terms.

A fixed-rate mortgage has the advantage of allowing a homeowner to have a fixed mortgage payment every month, for the life of the loan. The monthly mortgage payment is figured out on a schedule, and the homeowner pays the same mortgage payment, month after month, for as long as the loan is in effect.

The second most commonly used mortgage is the Adjustable Rate. Adjustable rate mortgages, or ARMs, became popular in the early part of the last decade, as more and more homeowners chose to jump in on the real estate boom and buy homes.

Adjustable rate mortgages appear attractive because initially, the interest rate on this type of mortgage is likely to be very low, thus making monthly payments low as well. However, the detriment to these types of loans is that after a certain period of time, such as five years, the interest rate "adjusts," usually going upward. Over the past few years, this “adjustment” left many people unable to pay their mortgages after a significant interest rate increase, and caused many people to lose their homes.

In general, adjustable-rate mortgages are only a good idea if you plan to be in your home for five years or less. Otherwise, the fixed-rate mortgage is generally the better of the two mortgages.

I third, less commonly used form of conventional mortgage is the Balloon. The balloon mortgage allows the homeowner to pay a specific monthly amount on the mortgage for what is usually seven years; at the end of that seven years, the rest of the loan is due all at once, in one lump sum. Whether or not this type of conventional mortgage is a good idea for you depends on whether or not you will definitely be able to come up with the money for the lump sum at the end of the loan term. A balloon mortgage is only a good idea if you're certain you're going to have the money to make the lump sum payment at the end of the seven years; if not, opt for a fixed mortgage if at all possible.

Now that we’ve reviewed types of conventional mortgages let’s consider the down payment options.

With the recent and ongoing economic and real estate downturn, it is understandable that there would be a shift to more rigid requirements from lenders. Gone are the days when conventional loans could be had with "no money down," or other special deals. Today, lenders are increasingly taking a close look at those they give mortgages to, and you'll need to be able to come up with a 10% down payment at minimum, all at once, or 20% if you don't want to pay for mortgage insurance.

You can determine how much your down payment is going to be very simply. Let's say, for example, that the home you want to buy has a purchase price of $ 200,000. 10% of $200,000 is $20,000, so that's your 10% down payment. 20% (which you'll want to pay if you want to avoid having to take out mortgage insurance) is $40,000.

Now that you know common conventional loan options and down payment requirements, it should make it easier for you to determine what your next steps should be. For many, home ownership still remains the American dream. With careful planning, focus and drive it is a dream that can be achieved.

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