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Conventional refinance guidelines

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What is a conventional refinance?

A conventional refinance is a non-government-backed loan that is used to refinance or replace any existing mortgage. It is also known as a conforming loan, since it conforms to standards set by the two leading rule-making agencies in the U.S., Fannie Mae and Freddie Mac.

A conventional loan can refinance any loan type, so it has many uses.

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These are just a few of the options available to conventional refinance applicants. This loan is one of the most flexible programs on the market. It's no surprise that conventional loans make up more than 60% of the market, according to loan software firm Ellie Mae.

Conventional refinance rates are low, thanks to their popularity and lenders' eagerness to attract conventional loan business.

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Conventional refinance rates

Mortgage rates for conventional loans are low thanks to strong backing by two of the world's largest lending agencies: Fannie Mae and Freddie Mac.

These two companies have been in government "conservatorship" since the housing downturn in 2008. What that means is that conventional loans come with an implied government guarantee.

That reduces rates for these loans.

Conventional loans are nearly in the same class as FHA loans. While conventional loan backing is not explicit as it is with FHA, many argue that the implied guarantee is keeping conventional mortgage rates artificially low

As a consumer, you can take advantage of ultra-low rates for a conventional refinance while they are available.

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How can I use a conventional refinance?

A conventional refinance loan is one of the most flexible products on the market. Homeowners are using it to accomplish a wide array of home finance goals.

1. Conventional refinances for non-owner occupied residences

One flexibility offered by this loan is around occupancy type.

Government-backed loans like FHA, the VA mortgage, and USDA home loan can be used only for a primary residence, i.e. the home you live in.

A conventional refinance loan, though, can be used for a primary residence, second home, or investment (rental) property.

2. Cash-out / debt consolidation conventional refinance

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You can also use a conventional cash-out loan to tap into the equity in your home. For example, if you owe $200,000 on a home worth twice as much, you can take out a loan for $300,000, replacing the former loan and receiving cash back at closing.

These proceeds can be used for any purpose: home improvement, debt consolidation, college financing, and more.

A conventional loan, then, can lower your monthly payments by paying off expensive credit cards, auto loans, and other payments.

A conventional refinance can even be used to take cash out of a rental property or second home. For property investors, this is an excellent way to remove equity from existing properties to purchase additional ones.

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3. Cancel FHA or USDA mortgage insurance

Many first-time home buyers choose a government-backed mortgage to get into their first home.

And for good reason.

Government-sponsored programs are flexible on credit scores and down payments. However, they come at a cost.

FHA loans include a monthly mortgage insurance premium (MIP) of $71 per month per $100,000 borrowed. USDA home loans, too, come with a monthly fee, typically $29 monthly per $100,000 in loan amount.

These fees are well worth homeownership. But owners don't want to pay the fees for life if they have enough equity to cancel these payments.

A conventional refinance exchanges an FHA or USDA loan for a conventional one, thereby eliminating associated monthly fees. And, with 20% or more equity, you pay no mortgage insurance on the new conventional loan.

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Home values are up 35% since 2012, and homeowners are realizing their equity makes holding government-sponsored loan fees unnecessary.

4. Refinance out of *any* type of loan

Many streamline refinance types require you to have a certain type of loan to use the program.

VA streamline refinance requires you to have a VA loan already, and the popular FHA streamline has a similar requirement.

HARP refinances require you to have an existing Fannie Mae or Freddie Mac loan.

But a standard conventional refinance can replace any loan type:

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In addition, mechanic's liens, tax liens, and judgments on your title can be paid off with a conventional loan.

There are absolutely no restrictions on your current financing type to use a conventional refinance.

5. Reimburse a cash home purchase

You can use a conventional refinance to reimburse yourself for a home paid for in cash.

The "delayed financing rule" allows you to make a quick purchase using cash -- as is often required with foreclosures and homes on the auction block -- without permanently depleting cash reserves.

Prior to the inception of this rule, investors had to wait six months to obtain a cash-out refinance on a home they just purchased. The rule eliminates that waiting period, as long as these requirements are met:

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The buyer must prove the home sale actually occurred and that no loan was taken on the home. A final HUD-1 document is adequate proof.

2017 conventional loan limits

Loan limits are higher for conventional refinance loans in 2017. The standard loan limits are based on the number of units in the home. The maximum number of units for a conventional loan is four.

Limits are higher in designated high-cost areas.

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For example, a one-unit home in Los Angeles, California can be financed up to $636,150 with a conventional mortgage, and a 2-unit home in Virginia Beach, Virginia is allowed a loan up to $587,400.

Search for conventional loan limits for any U.S. county with loan limit tool.

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Conventional streamline refinance

Many homeowners ask if there is a conventional streamline refinance. Streamline refinances are popular choices for FHA and VA loans. No appraisal is required for these programs, and, often, income and asset documentation requirements are waived.

Technically, there are no conventional streamline programs, but one option comes close: the HARP refinance.

Many HARP borrowers do not need to produce an appraisal to qualify.

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And, the income documentation requirement is often waived.

For instance, a nurse has been on the job for more than two years. The lender may only need to call the applicant's employer to verify continued employment.

The requirement for pay stubs, W-2s, and tax returns may be waived entirely.

With a HARP loan, Fannie Mae or Freddie Mac already own the loan and have on file the original documentation.

In many cases, they do not have to re-verify the home value or current income, making the HARP loan very close to a conventional streamline refinance.

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Loan-to-value (LTV) maximums for conventional refinance loans

Maximum loan-to-value will vary depending on the loan purpose, type of property, and whether the new loan is a fixed or adjustable rate mortgage (ARM).

For instance, lenders allow a much higher LTV for a primary residence than for a non-owner-occupied property.

Loan-to-value, or LTV, is the comparison between the loan amount and the property value. The higher the loan amount compared to home value, the higher the LTV.

Primary Residence Units Fixed Rate ARM
Standard Refinance 1-unit 97% LTV 90% LTV
  2-unit 85% LTV 75% LTV
  3-4 unit 75% LTV 65% LTV
Cash-Out Refinance 1-unit 80% LTV 75% LTV
  2-4 unit 75% LTV 65% LTV

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Second Home Units Fixed Rate ARM
Standard Refinance 1-unit 90% LTV 80% LTV
  2-4 unit not eligible not eligible
Cash-Out Refinance 1-unit 75% LTV 65% LTV
  2-4 unit not eligible not eligible

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Investment Property Units Fixed Rate ARM
Standard Refinance 1-4 unit 75% LTV 65% LTV
Cash-Out Refinance 1-unit 75% LTV 65% LTV
  2-4 unit 70% LTV 60% LTV

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Loan-to-value ratios for conventional loans are generous, and allow homeowners of all types to refinance a significant portion of their home's value.

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Conventional refinance credit score minimum

This refinance type is available down to a 620 score, or even lower in some cases.

At least, those are official Fannie Mae and Freddie Mac guidelines.

Many lenders will set a higher minimum around 640. But it should be noted that conventional loan rates are risked-based, unlike government-backed programs like FHA.

Fannie Mae publishes loan-level price adjustments, or LLPAs, which raise rates for higher LTVs and lower credit scores.

For instance, a homeowner with a 680 credit score and a loan-to-value of 80% will pay 1.75% more in fees than an applicant with a 740 score at 60% LTV. Those additional fees can be paid in cash, wrapped into the loan amount, or taken as a higher rate.

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A 1.75% fee translates to an approximate one-quarter of one percent increase in rate.

For this reason, homeowners with very low credit scores should consider an FHA refinance or  put strategies in place to increase their credit scores prior to applying for a conventional refinance.

Private mortgage insurance for conventional refinances

Conventional mortgages do not require an upfront funding fee or mortgage insurance premium as do FHA, VA, and USDA loans. And, no monthly mortgage insurance is required with 20% or more equity.

But homeowners can refinance into conventional if they do not have a full 20% in equity. In these cases, private mortgage insurance (PMI) will be required.

A homeowner may want to refinance into conventional -- even with a PMI payment -- because conventional private mortgage insurance is cancellable, unlike that of FHA and USDA loans.

Conventional PMI drops off when you hit 80% loan-to-value.

So you could replace an FHA loan with a conventional loan with PMI, for instance, then cancel PMI in a few years.

With high credit scores, conventional PMI is quite affordable, and, in some cases, is cheaper than FHA mortgage insurance.

Canceling FHA mortgage insurance with a new conventional loan can be a very wise strategy.

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Conventional refinance Q&A

Following are some of the most common questions homeowners have about conventional mortgage refinances.

I was considering an FHA streamline. Should I request a conventional refinance instead?

It is worth seeing if you have enough equity for a conventional refinance. The advantage of a conventional loan is that your mortgage insurance is cancellable, if you need it at all.

Should I apply for HARP or a conventional refinance? What is the difference?

A HARP loan is a sub-category of conventional mortgages. HARP eliminates some of the lending rules for standard conventional loans, such as loan-to-value limits. As a general rule, if you have less than 20% equity you should check your HARP eligibility. A HARP refinance does not require mortgage insurance if you don't pay it currently.

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My appraisal came in low. What now?

Some lenders offer an appraisal rebuttal process, but these are not typically successful. Check your eligibility for HARP. If you are not eligible, consider going through with the refinance. It's okay to take on cancellable conventional PMI if you are still saving money or putting yourself in a better financial position.

Can I get a conventional adjustable-rate mortgage?

Yes. Conventional refinance ARMs are a popular choice, especially for those planning to pay off their mortgage, sell the home, or refinance in five-to-seven years. ARMs offer an ultra-low rate, fixed, for a certain number of years (for instance five years fixed for a 5-year ARM). Adjustable conventional loans come with built-in safeguards. So the loan's upward rate adjustment -- if it goes up at all -- is typically no more than one to two percent each year.

Do all lenders offer conventional refinances?

Not all, but most. Conventional refinances are the most popular of all refinance types. It's safe to assume that nearly every lender in your city offers conventional mortgages.

How do I get a conventional refinance?

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First, get written quotes from three or four lenders on the same day. That will help you determine which lender is offering the best value. From there, proceed through the application and underwriting process, through which the lender of choice will guide each step.

What are today's conventional refinance rates?

Mortgage rates are low for all loan types, conventional refinances being no exception.

Get a quote, which requires no social security number to start, and comes with no obligation to proceed. Check today's rates at the link below to get started.


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