If you’re considering buying a home—or thinking about refinancing your current home loan—a conventional mortgage in Illinois could save you thousands of dollars over the lifetime of your mortgage.
Let’s look at what a conventional mortgage in Illinois is and whether it’s the right home loan product for your situation.
Are you ready to start your application?What is a conventional mortgage?
A conventional mortgage in Illinois is a home loan that isn’t guaranteed or offered by a government agency like the VA, FHA, or USDA.
Government-backed home loans must follow the guidelines set out by their agency.
This can mean tougher eligibility requirements for borrowers who face higher interest rates or are required to meet larger down payment minimums.
Conventional loans make up more than two-thirds of all mortgages, making them more popular than government-backed loans.
While conventional loans tend to have stricter eligibility requirements than VA or FHA loans, they offer several significant advantages—like no private mortgage insurance and low down payment options to borrowers who qualify.
There are two types of conventional loans: conforming loans and non-conforming loans (sometimes called “jumbo” loans).
Conforming loans in Illinois
Conforming loans are mortgages that follow the guidelines set out by Fannie Mae or Freddie Mac—this includes loan limits.
Fannie Mae and Freddie Mac will only buy mortgages that fall below the loan limits established by the Federal Housing Finance Agency (FHFA).
For most parts of the United States, the loan limit for 2022 was $647,200 for a single-family home, although, in some higher-priced areas like Hawai’i, California, and New York, the limit is $970,800.
Non-conforming loans
Homes that do not follow the Fannie Mae or Freddie Mac guidelines—including income limits—are non-conforming loans.
Homes in higher-priced areas or for purchase amounts above the FHFA limits are referred to as non-conforming or “jumbo” loans.
Fannie and Freddie do not purchase non-conforming loans.
Requirements for a conventional loan
Let’s look at the general requirements for conventional loans in Illinois.
Down payment
Many borrowers have heard that they need to have 20% for a down payment with a conventional mortgage. The truth, however, is that qualified borrowers can get a conventional mortgage in Illinois with as little as 3% down.
Credit score
While credit score requirements can vary depending on the lender you choose, it’s recommended to have a score of at least 620—although borrowers with “good” credit scores, i.e., above 700, will typically get the best interest rates possible.
Debt-to-income (DTI) ratio
Your DTI is how much you spent each month on debt and it’s usually expressed as a percentage. Most lenders look for a maximum DTI of 45%, although some limit a DTI to just 36%.
Advantages of a conventional mortgage in Illinois
Conventional mortgages offer qualified borrowers advantages such as the following.
Low-interest rates
Borrowers with good credit can benefit from lower interest rates, saving homeowners thousands over the lifetime of their home loan.
Use a mortgage calculator to see how much you can save with a lower interest rate.
Property type
Borrowers can use FHA and VA loans to purchase a primary residence only.
In other words, you can only use a government-backed loan to buy a home you plan to live in. By contrast, conventional mortgages don’t have the same property type limits.
Buyers can finance the purchase of a primary home, as well as second homes, investment or rental properties (including Airbnb), vacation homes, manufactured residences, and more with a conventional mortgage.
Conventional mortgages are typically cheaper
Government-backed home loans include fees that help fund the program.
Borrowers can often roll these fees into the total mortgage amount, which can mean paying interest on the additional amount for the entire loan term.
With conventional loans, there aren’t any upfront funding fees, which can translate into lower monthly mortgage payments and less accumulated interest.
For many homeowners, conventional loans are typically cheaper than FHA or VA mortgages.
To see how loan amounts can vary, use a mortgage loan comparison calculator.
It’s a great tool to help you calculate the difference between loans before you apply.
Find your perfect home with Homescout.Mortgage insurance
One of the popular advantages of conventional mortgages is the no-mortgage insurance option.
FHA loans mean paying mortgage fees
FHA loans require all borrowers to pay an upfront mortgage insurance premium (UFMIP) fee equal to 1.75% of their total mortgage amount—in addition to a monthly mortgage insurance payment.
The amount of your monthly mortgage insurance premium (MIP) is tied to your mortgage term and the loan-to-value ratio.
A conventional mortgage in Illinois means no upfront mortgage fee
Borrowers with down payments of less than 20% typically have to pay private mortgage insurance (PMI).
But, unlike FHA loans that require borrowers to pay insurance for the entirety of the mortgage loan, PMI can be eliminated when you build up at least 20% equity in the home.
There’s also no upfront mortgage insurance payment with a conventional mortgage.
Get rid of monthly insurance with a conventional mortgage
All borrowers with FHA loans must pay mortgage insurance for as long as they have their loan.
Homeowners with an existing FHA mortgage and at least 20% equity in their home can refinance their loan into a conventional mortgage and stop paying insurance.
How to not pay mortgage insurance fees
Thankfully, mortgage insurance isn’t always mandatory.
Borrowers who make a qualifying down payment or avoid government-backed loans can avoid paying mortgage insurance altogether.
How to apply for a conventional mortgage loan in Illinois
If you’ve got good credit and want to buy a second home or investment property, and would like smaller monthly mortgage payments or lower interest rates—a conventional mortgage loan in Illinois could be just what you’ve been looking for.
At AAA Banking, we’d love to discuss the different mortgage options you have available.
Whether you’re preparing to buy your first home or want to lower your monthly mortgage payments through refinancing, we want to help. Reach out to one of our local, licensed home loan officers.
Start your conventional mortgage application.Photo by MART PRODUCTION