Conventional loans offer many advantages to homebuyers, including attractive interest rates, lower costs and flexible home buying opportunities. However, conventional loan providers typically require higher credit scores and income qualifications before qualifying borrowers for conventional loans.
Conforming conventional loans follow guidelines set by Fannie Mae and Freddie Mac, with maximum loan limits that vary based on location. Loans exceeding these conforming limits are considered jumbo mortgages.
Down payment requirements
Conventional mortgage loans require a minimum down payment of 3%, although lenders may request higher down payments from homebuyers with low credit scores or debt-to-income ratios. Down payments range between 3- and 20% of the purchase price depending on lender policies; typically the larger your down payment is, the lower your mortgage loan payments and interest rates will be. Plus, building equity will help pay off your mortgage in future!
Conventional loans’ requirements depend on both the property being bought and borrower income levels. Lenders may set maximum percentage limits of monthly income that can go toward debt payments (such as mortgage, car loan and credit card bills) such as mortgage payments (which includes taxes and insurance payments) with conventional mortgages usually not exceeding 28% of this figure.
Conventional loans typically require higher credit scores and debt-to-income ratios than government-backed mortgages such as FHA and VA loans, since lenders assume all risk. Because conventional loans lack government support, they tend to favor those with good credit scores and steady income streams.
Conventional loans come in both conforming and non-conforming versions. Conforming loans meet guidelines established by Fannie Mae and Freddie Mac – two mortgage entities created to aid the housing market more smoothly – including meeting standards like maximum loan limits of $726,200 in most counties for single family homes. Non-conforming conventional mortgages do not conform to these standards and typically only available through private lenders.
Borrowers who opt for conventional mortgages typically face higher down payments than those who choose a government-backed loan, since conventional lenders have limited resources available to cover losses from defaults, making them more cautious about lending money to borrowers with poor credit profiles and limited financial reserves. Furthermore, conventional loans usually come with private mortgage insurance (PMI) requirements until at least 20% equity has been built up in their home.
Conventional home loans do not come backed by the government, so their lenders face more risk when offering them. Therefore, eligibility requirements tend to be stricter for conventional home loans compared with other options – this may include credit history requirements, debt-to-income ratios and how much of a down payment you can afford. Borrowers with limited income or savings may find qualifying for one more difficult. When this is the case for them it may be beneficial to explore options like FHA or VA financing instead.
As part of qualifying for a conventional loan, the first step should be establishing a credit score of at least 620. Lenders will then review your income, debts and assets to ensure you can afford mortgage payments; you can use an online mortgage calculator to estimate this figure.
Conventional mortgages typically require a home appraisal. An appraisal provides an unbiased, expert assessment of a property’s value by an appraiser licensed to perform appraisals. Repeat or first-time buyers can often qualify for conventional loans with as little as 3% down; if purchasing more expensive properties or wanting to avoid PMI premiums requires at least 20% deposit upfront.
Most conventional loans comply with the standards established by quasi-government agencies Fannie Mae and Freddie Mac (hence the term “conforming loan”). Each year, the Federal Housing Finance Agency sets limits for borrowing based on your region; conventional lenders then sell these loans back to Fannie and Freddie for funding so they can offer more mortgages to prospective borrowers.
Conventional lenders set their own eligibility requirements. They’ll consider your credit history and financial situation to assess if there’s any risk that you’re at risk of defaulting. They will also take into account your debt-to-income ratio (which measures how much of your income goes toward paying debts); those with high ratios could be at an increased risk of default and may be denied.
Conventional loans offer fixed-rate mortgages that offer predictable monthly principal and interest payments over the life of their loan, making this an excellent option for first-time homebuyers with sufficient down payments or refinancing homeowners looking to reduce long-term costs of their mortgage payments. They’re also great choices for people planning on selling their homes later on down the line.
Conventional home loans do not come with the guarantees provided by the Federal Housing Finance Agency (FHFA), meaning lenders have complete discretion in setting requirements to qualify borrowers – typically credit history and income are used to assess risk level; as a result, those with poor credit scores or large debt-to-income ratios may find it challenging to qualify for one of these mortgages.
Conventional lenders look beyond credit scores and income to evaluate other assets when considering your application for a mortgage loan. Furthermore, private lenders are free to compete among themselves to provide lower mortgage rates; so it is wise to shop around for the best conventional mortgage rate.
Conventional loan rates tend to be lower than government-insured mortgages and depend on factors like your down payment amount and credit profile. A larger down payment can help avoid mortgage insurance which typically applies for loans with down payments less than 20%; PMI typically costs between 0.3%-1.5% annually; it can be removed once an individual hits an 80% loan-to-value ratio.
Many people mistake interest rates and annual percentage rates (APR), both of which refer to what your loan will cost in interest payments. APR includes additional charges not directly tied to interest payments such as flat origination fees for document preparation costs as well as surveyor’s fees and closing costs.
Along with loan amount and term, you have the choice between fixed and adjustable rate mortgages. Fixed-rate mortgages generally provide the lowest initial interest rate and are best for borrowers with excellent credit profiles; adjustable-rate mortgages offer a lower initial rate that will then switch over time into something different.
Closing costs for conventional home loans typically range between 2% and 6% of the loan amount, compensating individuals or businesses that assist in the mortgage process such as real estate attorneys, title companies, escrow agents, credit reporting agencies and third-party service providers. Many fees are negotiable and you could save money by shopping around for better rates.
One of the more significant fees to consider when purchasing real estate is a lender’s closing fee, as it usually covers their research and underwriting expenses as well as appraisal, property transfer taxes and any associated costs such as home inspection, pest inspection or flood insurance premiums. Conventional lenders tend to have less stringent appraisal and property requirements compared to FHA, VA or USDA loans.
A conventional mortgage loan also requires the borrower to purchase private mortgage insurance (PMI). Though this expense is extra, it can save buyers significant money over time – typically after they’ve built 20% equity in their home and cancelled PMI at that point; some buyers opt to pay upfront through closing costs or higher interest rates.
If you’re purchasing a conventional loan, your closing disclosure statement from your lender should arrive three days before closing date. Compare it against your initial loan estimate and inquire as to any discrepancies between these documents; any discrepancies could incur additional fees at closing.
Many closing cost fees are negotiable in hot markets where conditions favor sellers, and you could try getting the seller to cover some or all of your closing costs or negotiate a reduced purchase price in exchange for paying more of them yourself.
One way to reduce closing costs is to close your loan at the end of each month. This will allow you to avoid prepaying interest charges that add up quickly, and negotiate with your lender about lowering closing costs; doing so might save money!