Standard fixed-rate mortgages
A conventional mortgage is a home loan that falls under the conforming loan limit of $726,200, and can be as high as $1,089,300 in high cost area, which is set annually by the Federal Housing Finance Agency. The interest rate is fixed and the loan term is typically 15 or 30 years.
Best for: People with 680+ Fico, down payments, or equity
A conventional loan is a type of mortgage that is not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, it is issued by a private lender or financial institution and is often the most popular choice for homebuyers. In this blog post, we’ll explore what a conventional loan is, how it works, and its benefits and drawbacks.
First, let’s define a conventional loan. A conventional loan is a mortgage that is not insured by a government agency, such as the FHA or VA. Instead, it is issued by a private lender, such as a bank or credit union. Conventional loans are available in a variety of terms, including fixed-rate and adjustable-rate mortgages (ARMs). They can be used to purchase a home, refinance an existing mortgage, or even to take out a second mortgage.
One of the main benefits of a conventional loan is that it often has a lower down payment requirement than other types of loans. While the exact amount will vary depending on the lender and the borrower’s credit score and income, a conventional loan typically requires a down payment of 3% to 20% of the purchase price of the home. This is compared to an FHA loan, which requires a down payment of at least 3.5%, or a VA loan, which requires no down payment at all for eligible borrowers.
In addition to a lower down payment requirement, conventional loans also tend to have more flexible credit score requirements than other types of loans. While the exact credit score needed to qualify for a conventional loan will vary depending on the lender, a score of 620 or higher is generally considered the minimum for most conventional loans. However, it’s important to note that the higher your credit score, the better your chances of securing a lower interest rate and more favorable terms on your loan.
One of the key factors that determines whether you qualify for a conventional loan is your debt-to-income ratio (DTI). This is a measure of how much of your monthly income goes towards paying off debts, including your mortgage, credit card payments, and other loans. Most lenders prefer a DTI ratio of 43% or lower, although some may be willing to consider higher ratios on a case-by-case basis.
Another important factor to consider when applying for a conventional loan is your credit history. Lenders will look at your credit report to see how well you have managed your credit in the past, including whether you have made timely payments and whether you have a high level of outstanding debt. A strong credit history can improve your chances of being approved for a conventional loan and securing a lower interest rate.
Now that we’ve covered some of the basic details of a conventional loan, let’s discuss the pros and cons of this type of mortgage.
One of the major benefits of a conventional loan is that it tends to have lower closing costs than other types of loans. This is because conventional loans are not insured by the government, which means that the lender bears more of the risk and therefore charges higher fees to compensate. As a result, borrowers may be able to save money on origination fees, appraisal fees, and other closing costs when they opt for a conventional loan.
Another advantage of a conventional loan is that it can be a good option for borrowers who have a high credit score and a strong financial profile. Because conventional loans are not insured by the government, lenders have more discretion when it comes to granting approval and setting interest rates. As a result, borrowers with strong credit and financial profiles may be able to secure more favorable terms on a conventional loan than they would with an FHA or VA loan.
However, one potential drawback is that conventional loans may not be an option for borrowers with less than perfect credit or a low down payment. Because these loans are issued by private lenders, they have stricter credit and income requirements and may not be as forgiving as government-insured loans. Borrowers who don’t meet these requirements may have a harder time qualifying for a conventional loan and may need to consider alternative options.
Another potential downside of a conventional loan is that it may require private mortgage insurance (PMI) if the borrower puts down less than 20% of the purchase price of the home. PMI is an insurance policy that protects the lender in the event that the borrower defaults on the loan. While PMI can help make homeownership more accessible for borrowers who don’t have a large down payment, it can also add an extra cost to the monthly mortgage payment.
In summary, a conventional loan is a type of mortgage issued by a private lender that is not insured by a government agency. It can be a good option for borrowers who have a strong credit score and financial profile and who can afford a higher down payment, as it tends to have lower closing costs and more flexible credit requirements. However, it may not be the best choice for borrowers with less than perfect credit or a low down payment, as they may have a harder time qualifying and may need to pay PMI. As with any major financial decision, it’s important to carefully consider your options and consult with a financial professional before choosing a mortgage.