Conventional Loans: What You Need To Know
A conventional loan is a type of mortgage that is not guaranteed or insured by any government agency, such as the Federal Housing Administration (FHA), the Veterans Administration (VA), or the United States Department of Agriculture (USDA). Instead, conventional loans are issued by private lenders, such as banks, mortgage companies or credit unions, and are typically based on the borrower’s creditworthiness, income, and debt-to-income ratio.
Conventional loans may have fixed or adjustable interest rates and are generally available with various terms, such as 10, 15, 20, 25, or 30 years. Shorter terms may come with higher monthly payments and lower interest rates, while longer terms have lower monthly payments and higher overall interest costs. Conventional loans require a down payment, which can vary depending on the lender and the borrower’s creditworthiness.
Conventional loans can be used for purchasing a new home or refinancing an existing mortgage. These loans typically offer more flexibility than government-backed loans, but may require higher credit scores and down payments.
How are Conventional Loans different from Government Loans?
Conventional loans and government loans differ in several ways:
- Credit scores: Conventional loans are generally available to borrowers who have higher credit scores, while government loans may have more lenient eligibility requirements.
- Down payment requirements: There might be exceptions for first time homebuyers, but typically conventional loans require a higher down payment, often ranging from 5% to 20% of the purchase price. Government loans, on the other hand, may have lower down payment requirements, such as 3.5% for FHA loans or 0% for VA or USDA loans.
- Private Mortgage insurance (MI): Conventional loans may require private mortgage insurance (PMI) if your down payment is less than 20% of the purchase price, while government loans may require different types of mortgage insurance, such as FHA mortgage insurance or VA funding fees.
- Loan fees: Government loans may have more specific fees, such as an FHA upfront mortgage insurance premium, while conventional loans may have fewer fees or different types of fees, which vary by lender.
Overall, conventional loans may offer more flexibility in terms of eligibility requirements, loan terms, and fees, while government loans may offer more accessibility for borrowers with lower credit scores and limited down payment funds.
Advantages and Disadvantages of a Conventional Loan
There are several advantages to obtaining a conventional loan:
- Higher loan size limits: Generally, conventional loans often have higher loan size limits than government loans, which can be advantageous for borrowers who need to finance a higher-priced home. Conventional loans have both conforming and non-conforming loan limits. Conforming loans adhere to the maximum loan amount set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. Non-conforming loans, also known as jumbo loans, exceed these size limits and may have different requirements that will vary from lender to lender.
- No property restrictions: Unlike government loans such as USDA, FHA, or VA loans, conventional loans do not have property restrictions, so borrowers can purchase or refinance any type of property they wish, including second homes or investment properties.
- No upfront mortgage insurance premium (MIP): Unlike government loans such as FHA loans, conventional loans do not require an upfront mortgage insurance premium, which can save borrowers thousands of dollars at closing.
- No funding fee: Conventional loans do not require a funding fee like VA loans, which can save veterans and military personnel money on their home purchase or refinance.
- No long-term mortgage insurance: Mortgage insurance will stay in place for the life of an FHA loan, but it will automatically cancel on a conventional loan once the borrowers reach 22% of equity.
- Appraisal waiver: Depending on the specifics of the situation, there may be an appraisal waiver option on a conventional loan. There is no appraisal waiver option on most government loans.
The main disadvantages of a conventional loan are:
- Stricter eligibility requirements: Conventional loans typically require higher credit scores and a larger down payment than government loans. This can make it more challenging for some borrowers to qualify.
- Limited Assistance Programs: Government-backed loans, such as FHA and VA loans, offer specific programs to assist borrowers with lower incomes or first-time homebuyers. Conventional loans do not come with such programs, making it potentially harder for some individuals to enter the housing market.
Qualification Requirements for Conventional Loans
The specific requirements for a conventional loan can vary depending on the lender and the borrowers’ financial situation, but some common requirements include:
- Credit score: Generally, lenders prefer borrowers to have a credit score of 620 or higher. However, a higher credit score may be required to qualify for the best interest rates.
- Debt-to-income ratio: Lenders look at a borrower’s debt-to-income (DTI) ratio to determine their ability to repay the loan. Generally, the DTI ratio should be below 50%, but some lenders may have stricter requirements.
- Down payment: Conventional loans typically require a down payment of at least 5% of the purchase price. However, a higher down payment may be required to qualify for better interest rates.
- Private mortgage insurance (PMI): If the borrowers’ down payment is less than 20% of the purchase price, they may be required to pay for private mortgage insurance (PMI) to protect the lender in case of default. PMI adds to the monthly mortgage payment and can increase the overall cost of the loan.
It is important to note that these requirements are not set in stone and can vary from lender to lender. Some lenders may have additional requirements or specific criteria that must be met. It is important for borrowers to shop around and compare offers from multiple lenders to find the best loan for their individual situation.
Overall, conventional loans can be an excellent option for borrowers who meet the credit score eligibility requirements and have the ability to make a significant down payment. Borrowers who cannot meet these requirements may need to consider alternative financing options.
Remember that the specific terms and requirements of conventional loans can vary among lenders, so it is essential to research and compare different options to find the one that best suits your needs and financial situation. Please reach out to me with your questions regarding loan types at 312-296-4175 or email me at firstname.lastname@example.org. I lend in all 50 states and I am never too busy for your referrals!!
I have been in the mortgage industry since 1997 and I understand the anxiety that comes with making the most expensive investment of a lifetime. My objective is to be your advisor, to educate you and to make the mortgage loan transaction as transparent and as stress-free as possible. I enjoy establishing personal connections and work mostly by referral. I thoroughly explain the process and available options, and guide my clients to make choices that best fit their needs and financial goals. Once the underwriting begins I communicate regularly and keep my clients apprised of the loan status from the beginning through the end. My relationship with clients does not end at the closing table. You are my client for life and I am always available to answer your questions and provide you with guidance.