Conventional home loans provide many advantages to homeowners who satisfy their eligibility criteria, such as flexible loan terms, the option to buy second homes or investment properties without incurring additional PMI rates, and higher maximum DTI limits than FHA, VA, or USDA loans.
Conventional home loans have more stringent credit and down payment requirements compared to government-insured home loans because lenders assume greater risk with them.
Credit scores are an essential element of conventional mortgages and government-backed FHA and USDA home loan programs, including conventional lenders typically requiring a minimum credit score of 620 for conventional lenders, but you could potentially get approved with less. Lenders look at your scores from all three bureaus (Experian, TransUnion and Equifax), using the middle score from each bureau for eligibility – for instance if both you and your co-borrower each possess scores of 700 then 680 would be used by them as the approval standard – for instance if both co-borrowers had scored 700 scores then 680 would be used by them as they’d use it when making their approval decisions compared with others with similar scores – for conventional lenders at least!
Conventional mortgages typically have more stringent requirements than government-insured home loan programs because the lenders are taking on greater risk. For instance, conventional mortgages often require higher credit scores and debt-to-income ratios than FHA or USDA loans and often feature lower maximum loan amounts than government-backed options.
Conventional mortgages come with either fixed or adjustable interest rates. Most people choose fixed rates because it provides stability and peace of mind; however, with an adjustable rate mortgage (ARM), your monthly payments could change up or down as an ARM is used.
Conforming loans typically fall under conventional loans if they meet the standards established by Fannie Mae and Freddie Mac, two government-sponsored enterprises that purchase mortgages from lenders and resell them, freeing up capital to help more people buy homes. Conforming mortgages also generally qualify for better interest rates.
Another advantage of conventional mortgages is that making a 20% down payment allows you to forego private mortgage insurance (PMI). While PMI is required by FHA mortgages and USDA loans, you can cancel it once you build 20% equity in your home.
At the core of conventional home loan qualifications lies your credit score; however, other aspects like income can also play an integral part. Income requirements for conventional mortgages use underwriting guidelines and your debt-to-income (DTI) ratio to assess whether there is enough cash available to you to cover both monthly mortgage payments as well as other home expenses.
Conventional mortgages don’t rely on government support; however, they still generally adhere to many of the same guidelines set by FHA and VA loans – such as minimum credit score requirements and downpayment requirements. But conventional home loans typically allow more flexibility when it comes to repayment timelines, types of properties available for purchase, downpayment amounts and repayment timelines than their federally insured counterparts.
A conventional loan program tailored specifically for you depends on your goals and finances, repayment timeline preferences, property types and more. Conventional lenders tend to offer longer payment timelines than 15 and 30-year mortgages as well as more property types like second homes and investment properties; some even provide jumbo mortgages for more expensive properties.
Typically, conventional mortgages require at least a three percent down payment; however, certain lenders offer low-down-payment programs designed to assist buyers with limited savings. If purchasing an expensive home or have poor credit, additional funds may be required as down payments.
Another key consideration when selecting a conventional loan is its maximum loan limit. While conventional conforming loans have limits set by Fannie Mae and Freddie Mac, non-conforming conventional mortgages offer additional borrowing capabilities for homebuyers who require borrowing more than what’s permitted with conforming loans; these loans may incur more costs and often come with stringent eligibility requirements that include higher debt-to-income ratio and credit score requirements.
Conventional mortgages also require private mortgage insurance (PMI), which protects lenders in case you default on your loan. Once you reach 20 percent equity in your home – typically five or seven years into ownership – PMI premiums will no longer need to be paid; by contrast, FHA mortgage insurance premiums must continue for the life of the loan.
Conventional home loans can be an attractive option for first-time homebuyers with excellent credit and enough savings for a down payment, however you should explore all your mortgage options to ensure you find one best suited to your needs.
Conventional home loan closing costs consist of fees and taxes paid to complete a mortgage transaction. While these expenses can quickly add up, there are ways to cut them back – for instance using a credit card with no introductory APR can help pay some closing costs up front.
Conventional closing costs typically consist of loan origination fees, underwriting fees and escrow services fees charged by lenders for processing your loan application and underwriting it – usually one to two percent of your loan amount but these rates may differ based on each lender.
At closing, in addition to these charges, you’ll also need to pay transfer taxes and property insurance premiums. Most lenders also require that an escrow account is created for future homeowners’ insurance payments and property tax payments; generally speaking, you should prepay two months’ equivalent of property tax payments at closing in order to fund it properly – you can use NerdWallet’s property tax calculator for an estimate.
If you purchase a home with less than 20 percent equity, conventional loans require private mortgage insurance (PMI). This expense is generally included as part of your monthly mortgage payment; however, once 20 percent equity has been achieved it can be cancelled.
As another way of lowering conventional closing costs, taking advantage of available assistance programs may also be effective. Such assistance programs may include grants or low-interest or forgivable loans from state housing finance agencies, local governments and lenders.
Reducing conventional closing costs requires either decreasing your down payment or purchasing distressed properties. Fannie Mae Home Possible and Freddie Mac HomeReady programs allow borrowers to qualify for conventional loans with as little as 3% down payment; conventional loans also have less strict property and appraisal requirements compared with FHA or USDA loans, providing you more information on qualifying. To learn more, use our mortgage calculators or talk with a lender near you.
Conventional mortgages are perfect for people with excellent credit and consistent income who require lower interest rates than government-backed home loans, yet may not come close to offering as low an APR as some alternative loan products do.
Conventional mortgages typically feature fully amortized payments that remain the same throughout your loan term. However, you could also select an adjustable-rate conventional loan, in which the interest rate could fluctuate over time and influence how much you owe each month.
Before applying for a conventional mortgage loan, you’ll need to save for a down payment and meet a lender’s credit score requirement. Most lenders prefer that applicants meet at least the 620 threshold; however, they may accept higher scores under special consideration. Furthermore, lenders will assess your debt-to-income ratio to make sure you can afford the mortgage payment.
Even though conventional mortgages can be more restrictive than some government-insured options, they still provide many advantages for borrowers with good credit and large down payments. Conventional loans usually feature lower mortgage insurance premiums than FHA mortgages and typically allow the cancellation of PMI when 20% equity has been achieved in their home.
Conventional mortgages also allow you to purchase larger homes than with some other home loans, with conforming conventional loans typically offering up to $548,250 as the upper limit; there are jumbo mortgage options that allow even greater borrowing power.
Conventional mortgages can be found through banks, credit unions, savings and loan associations and other private institutions; mortgage brokers also provide conventional loans that fit their clients’ needs and budgets.
Conventional mortgages tend to be easier and less expensive to qualify for than government-insured home loans, though it’s still important to do research into all of your available loan options before choosing one. It may help if you consult a financial advisor or mortgage professional before making your final decision.