66% of home buyers opted for a conventional loan in 2024. They are non-government backed loans that can help you qualify for larger mortgages and get your dream home!
A conventional loan has less stringent requirements than a government loan. Plus, you might be able to negotiate seller concessions of up to 6%, potentially saving thousands on your upfront expenses.
But before you opt for a loan, get a pre-approval to determine your loan amount and budget your monthly payments.
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What Is a Conventional Loan?
A conventional loan is a mortgage that you get from credit unions, private banks, and mortgage companies. It is not backed by any government agency.
How Does a Conventional Mortgage Work?
Conventional mortgages work on the basis of loan terms:
- Fixed-Rate Mortgage: In this, your interest rate remains fixed for 15 or 30 years over the life of the loan.
- Adjustable-Rate Mortgage: In this, your interest will remain fixed for a specific period for 5 or 7 years, and then change annually over the life of the loan.
What Are Conventional Loan Requirements?
Conventional loans come with specific requirements that borrowers must meet to qualify. Here’s a breakdown of the criteria:
- Credit Score: 620 is the minimum credit score required. Anything higher than that can help you secure better rates.
- Down Payment: Generally you require a down payment of 3% to 20%.
- Private Mortgage Insurance (PMI): If your down payment is lower than 20%, you will require a Private Mortgage Insurance (PMI).
- Debt-To-Income (DTI) Ratio: Typically, most lenders prefer a DTI ratio below 43%.
- Property Requirements: Your property must be a primary residence, a second home, or an investment. Additionally, you also require a home appraisal to determine your property value.
What Are the Types of Conventional Loans?
Conventional loans can be categorized into two main categories:
1. Conforming Loan
Conforming loans follow the criteria established by Fannie Mae and Freddie Mac. These include borrower financial stability standards, specific loan limitations, credit score, down payment options, and more.
The FHFA determines the conforming loan limits, which is $766,550 in 2024 (and $1,089,300 for high-cost areas).
2. Non-Conforming Loans
Non-conforming loans, also known as jumbo loans, exceed the loan limits set by government-backed agencies. These loans are ideal to purchase luxury homes or properties in high-cost areas.
Conventional Loans vs. FHA Loans
| Factors | Conventional Loans | FHA Loans |
| Down Payment | 3% to 20% down payment. | 3.5% to 20% down payment. |
| Credit Score: | 620 or higher. | 580 or higher. |
| Property Types | Used for primary residences, second homes, vacation properties, and investment properties. | Only used for primary residences and agricultural properties. |
How to Apply For a Conventional Loan?
Here’s how you can apply for a conventional loan:
- Get a Mortgage Preapproval: A pre-approval letter indicates that you are a serious buyer and can likely secure a mortgage.
- Shop For a Lender: Compare lender fees and look for lenders who offer flexible terms.
- Fill Out the Loan Application: Provide personal and financial information, like pay stubs, tax returns, and bank statements.
- Undergo Loan Underwriting: Your lender will assess your creditworthiness and verify your documents. This process also involves home appraisal, property inspection, and title search.
- Close on the Loan: Once approved, sign the loan documents, make a down payment and pay closing costs.
What Are the Pros and Cons of a Conventional Loan?
Pros
- Higher Loan Limits: You can finance expensive homes, especially in high-cost areas.
- No Upfront Insurance Premium: Unlike FHA loans, there is no upfront mortgage insurance premium. You have to only pay PMI for down payment below 20%.
- Easier to Refinance: More straightforward refinancing options once equity is built.
- Better Rates for High Credit Scores: Get competitive rates with a good credit score (620+).
Cons
- Higher Down Payment: Requires a larger down payment, usually 20%.
- Stricter Credit Requirements: Requires a higher credit score (minimum 620).
- Tighter DTI Limits: Generally, your debt-to-income ratio needs to be below 45%.
- Higher Closing Costs: Can have higher closing costs than FHA loans.
Is Down Payment Assistance Available With a Conventional Loan?
You can get Down Payment Assistance (DPA) with a conventional loan. A DPA can provide grants or loans to help cover a portion of your down payment. DPA programs are offered by the state and local governments, local housing Authorities, and lenders.
Should You Opt for a Conventional Loan?
You should opt for a conventional loan if you have a credit score of 620 or above. This will help you secure interest rates below 7%.
To maximize your benefits, you can save for a larger down payment and avoid PMI. So, why wait? Start your home-buying journey now!
» Need More Clarity? Read these exclusive Houzeo reviews and learn why the platform is the best in America’s competitive housing market.
Frequently Asked Question
What does a conventional loan mean?
A conventional home loan is a loan you borrow from a private lender. Conventional mortgages are not subject to specific government regulations.
How much is the credit score needed for conventional loan?
One of the requirements of a conventional loan is a credit score of 620 or above.
How much down payment for conventional loan?
You have to pay 3% for FRM and 5% for ARM as down payment. If you put less than 20% down, you need to pay PMI.
