What are conventional home loans? Some things are defined by what they are. Some things are defined by what they aren’t. Conventional loans technically fall in the second category. Exploring what makes a conventional loan a conventional loan can help you determine if this popular form of financing is the tool that you need to make your housing dreams a reality.
What Are Conventional Home Loans?
Learning what makes a conventional home loan tick is an important starting point. From there, you’ll want to explore the pros and cons of this type of mortgage. Then, you’ll need to know the typical requirements borrowers will need to meet if they hope to be approved for a conventional loan.
Defining a Conventional Home Loan
What are conventional home loans? As NerdWallet explains, their defining characteristic is what they are not. Consider this: FHA, VA, and USDA loans are mortgages that are backed by the federal government. They are insured in part by a federal agency. Conventional mortgages are different; they are not federally guaranteed.
The Pros and Cons of Conventional Mortgages
Every type of home loan comes with its own mix of pros and cons. Familiarizing yourself with that mix allows you to pick a loan product that suits your specific situation. Experian offers a breakdown of the pros and cons of conventional mortgages:
- Pro: Low interest rates. Your interest rate is linked to your creditworthiness, so borrowers with stellar credit scores can enjoy low rates. This can help keep both monthly payments and the overall cost of borrowing down.
- Con: Higher credit score standards. You generally need a credit score of at least 620 to be considered for a conventional loan. In contrast, FHA loans can be secured with a credit score as low as 500.
- Pro: Flexibility. Government-backed loans often have lots of strings attached. They may involve income, the type of residence, its location, its condition, or other factors. Conventional loans are far more flexible.
- Con: Stricter qualification guidelines. Because they’re riskier for lenders, conventional loans have more stringent qualifications for borrowers.
- Pro: Higher loan limits. Conforming loans may have lower limits, but jumbo loans open the door to more possibilities, making conventional loans the way to go if you need to borrow a large sum.
- Con: Down payment needs. Borrowers with solid credit can get a conventional loan with 3 percent down. However, putting anything less than 20 percent down means that you’ll need to pay for private mortgage insurance.
Qualifying for a Conventional Home Loan
What does it take to qualify for a conventional home loan? Without the backing of a federal agency to reduce the risk, lenders are careful to vet potential borrowers and set stricter standards for these loans than they do for other popular loan programs. If you’re interested in applying for a conventional loan, it’s helpful to know what to expect. Credible provides a basic summary:
- Credit score. A credit score of at least 620 is needed. A higher credit score will snag you a better interest rate and more favorable terms.
- Debt-to-income (DTI) ratio. Lenders want to see a DTI ratio of 50 percent or less. Here, lower is better.
- Down payment. You’ll need to make a down payment of at least 3 percent. If you want to avoid private mortgage insurance, you’ll need to put down a minimum of 20 percent.
- Mortgage insurance. Private mortgage insurance isn’t required for every loan. It’s only involved in loans when down payments are less than 20 percent. When it is required, there are no upfront fees. Instead, premiums are made in monthly payments, and the policy is automatically canceled when the loan-to-value ratio equals 78 percent. There are also ways that you can take action to end the policy sooner when you obtain 20 percent equity.
- Property type. You can use a conventional mortgage to fund the purchase of a primary residence, second home, or investment property.
Whether you have questions about conventional loans or want to learn more about some other form of financing, the team at PrimeLending Dallas would be delighted to provide you with answers. Contact us today to start a discussion about your housing goals.