Conventional Loans: Requirements, Types and Benefits

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59% of first-time buyers opt for conventional loans making it the go-to choice when it comes to home buying. 89% of the sellers accept conventional financing which is the highest as compared to other financing sources.

It’s easier to get a conventional loan than an FHA or VA loan due to lenient qualifications and flexible requirements. If you have secured conventional financing search your house on Houzeo.

What Is a Conventional Loan?

A conventional loan is a mortgage you obtain from private lenders such as banks, credit unions, and mortgage companies. However, it is not backed or guaranteed by government agencies. You can repay a conventional loan over 30 years. If you can afford higher monthly payments, you may choose to repay your loan within 15 to 20 years.

Conventional Loan Requirements

For a homebuyer to be eligible for a conventional loan, they must meet certain basic requirements:

• Have a credit score of 620 or higher.

• Make a down payment between 3% to 20%.

• If the down payment is less than 20% then opt for Private Mortgage Insurance.

• Lenders accept a maximum debt-to-income ratio of 50%. However, they prefer a lower DTI if the loan amount is bigger.

What Are the Types of Conventional Loans?

Here are the two types of conventional loans:

Conforming Loans

Conforming loans are types of mortgages that follow the standards and criteria established by Fannie Mae and Freddie Mac. These criteria include borrower financial stability standards, specific loan limitations, credit score, down payment options, and more. 

Non-Conforming Loans

Non-conforming loans are also referred to as jumbo loans. These loans are not bound by any loan limits set by government-backed agencies. 

You can apply for a non-conforming loan if you plan to purchase higher-priced properties. However, such loans require a higher credit score and a larger down payment.

Benefits of Conventional Loans

The benefits of conventional loans are as follows:

1. Flexibility: These loans might provide more flexible interest rates, particularly if you have a good credit score.
2. Maximum Loan Limits: Higher loan limits than government-backed loans. It helps you to finance an expensive home.
3. No Fee: Conventional loans have no upfront fee, whereas government-backed loans such as FHAs and VAs charge an upfront payment.

Conventional Mortgage vs. Other Loans

Here are some distinctions between conventional mortgages and other loan types.

Conventional Loans vs. VA Loans

	Conventional Loans	VA Loans
Eligibility Criteria	Conventional loans are granted to the general public.	VA loans are available to veterans, active-duty service members, and servicing spouses.
Extra Fee	Can avoid PMI with 20% equity paid.	VA loans have to pay a VA funding fee.

>>VA Loan vs Conventional Loan: Select the Loan That Meets Your Requirements.

Conventional Loans vs. FHA Loans

	Conventional Loans	FHA Loans
Down Payment	Conventional loans require a down payment of 3% to 20%.	FHA loan requires a minimum down payment of 3.5%.
DTI	DTI is around 45% in conventional loans.	In FHA loans DTI is around 50%.

Conventional Loans vs. USDA Loans

	Conventional Loans	USDA Loans
Qualification Requirements	Conventional loans don’t have a specific income requirement.	USDA loans have limitations based on family size and the borrower’s location.
Location	Conventional loans are available for properties in urban areas.	USDA loans are mainly for people who live in rural and suburban areas.

Understanding how different loan amounts, terms, and interest rates affect your budget is crucial. Use a mortgage calculator to estimate your monthly payments based on these factors.

What Are the Rates for a Conventional Mortgage?

Conventional loans have lower mortgage rates but not as low as government-sponsored agencies. Also, interest rates on conventional loans depend on the your down payment.

Moreover, the borrower has to pay 3% to 20% of the down payment if not PMI is required. An individual’s credibility and financial status can determine eligibility for the loan.

Bottom Line

Conventional mortgages lack federal guarantees. You may also find it more challenging to qualify for it than government loans. But with a credit score of at least 620 and a down payment of 3% or more, you may secure a conventional loan.

However, we would advise you to compare with different lenders to make an informed decision. You can start by comparing lenders online. To start your home search, browse properties online.

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FAQs

• USDA Loans