Is A Conventional Home Loan Right For You?
Sarah Li Cain3-minute read
January 27, 2021
What Is A Conventional Loan?
A conventional loan is a type of mortgage that isn’t formally backed by a government agency such as the FHA or VA. Instead, it’s a loan that follows guidelines such as income and down payment requirements set by Fannie Mac and Freddie Mae – agencies that work to standardize mortgages in the U.S. Terms for conventional loans typically span 15, 20 or 30 years.
There are two types of conventional mortgages: conforming and nonconforming loans. Conforming loans follow the guidelines from Fannie Mae and Freddie Mac. It typically has to do with how much you can borrow – for 2020 it’s up to $548,250 for most parts of the U.S. Areas that have higher costs can be up to $822,375.
Also referred to as jumbo loans, nonconforming loans are for those who need an amount that’s higher than the limits for a conforming loan in their location. These types of loans tend to be riskier to lenders, therefore rates can be higher. It might be harder to find a lender who’s willing to grant a jumbo loan.
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What Are The Requirements For A Conventional Loan?
Requirements will differ from lender to lender, but in general, conventional loans have minimum credit score and down payment requirements. Borrowers typically need to have a good credit score – usually 620 – in order to qualify, but the higher your score, the better your chances of approval.
There are also requirements as to how much you need to bring to the table. A conventional loan down payment has traditionally been 20%, but borrowers can now put down as little as 3%. This amount can depend on the borrower’s credit history as well as the lender.
Mortgage lenders also look at your debt-to-income ratio, which is the percentage of the amount of monthly debt payments you make versus your gross (pretax) income. This number shows lenders that you’re not going to take on more debt than you can handle – it’s safe to assume that the lower your DTI, the better. In most cases conventional loan lenders want your DTI to be 50% or less.
Borrowers will also need to take into consideration out-of-pocket costs during closing (it can be more than other kinds of mortgages). For example, you might need to pay appraisal and origination fees. If you have less than 20% as a down payment, you’ll most likely need to pay private mortgage insurance.
What Is Considered A Good Conventional Loan Mortgage Rate?
A good mortgage rate depends on a number of factors such as your credit score, how much you want to borrow and the desired mortgage term. It’s safe to assume that the higher your credit score, the more likely you’ll qualify for the lowest rates.
Of course, there are other factors that could affect your interest rate, like the loan term (15-year mortgages tend to have lower rates than 30-year ones), your DTI, your income, whether you have a co-signer and the amount you have for your down payment.
That’s why experts recommend shopping around to find the best rates you can qualify for.
Should I Get A Conventional Loan?
Just because a conventional loan is a popular choice and can get you a lower interest rate doesn’t mean it’s the best choice for you. In fact, if you have a low credit score, you may not even qualify for one.
But you still have options: an FHA loan, which is backed by the Federal Housing Agency and requires a minimum 580 credit score; or a VA loan, which technically doesn’t have minimum score requirements.
Neither of these options require a high down payment, either – the FHA loan only requires 3.5%, whereas a VA loan doesn’t require a down payment at all.
In many cases, conventional loans are the least restrictive of the other mortgage types. For one, not everyone can qualify for a VA loan – only certain active duty military members, veterans, or their spouses. FHA loans require you to pay PMI throughout the lifetime of the loan, unlike a conventional loan where PMI stops after you reach a certain amount of equity.
Find Your Next Home
Conventional home loans can be a great choice for borrowers who have good credit, a strong financial history and enough money to make a down payment. That being said, the other types of mortgages also have their advantages. Take the time to shop around and compare the various mortgage types so you can find your best fit.
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