When it comes to financing your home, you have many options at your disposal. Each loan has its pros and cons, and what you choose will be based on many factors, but conventional loans are the most popular.
If you have a high enough credit score and a large enough down payment, a conventional loan might be right for you.
What is a Conventional Loan?
A conventional loan is a traditional loan that is used to purchase a property but is not backed or guaranteed by any government agency. Conventional loans are also known as conforming loans because they “conform” to Fannie Mae and Freddie Mac standards.
It has several features that make it a great choice for many new home buyers, especially those who have good credit, have the available funds for a down payment and are at low risk for defaulting.
These features include:
- Low-interest rates
- Fast loan processing
- Several down payment options
- Low private mortgage insurance (PMI)
- No PMI required if the down payment is 20% or more
Do I Qualify for a Conventional Loan?
Conventional loans have stricter requirements than others. Because conventional loans are not backed by the government, there is no guarantee to the lender for re-payment if the buyer stops making their mortgage payment. Due to this higher-risk for lenders, this type of loan also has higher standards to qualify.
To qualify, you will need:
- Two years of reliable employment
- A healthy savings account
- Good credit history/credit score (preferably 620 or higher).
- A low debt-to-income ratio (below 50% of your gross monthly income)
Conventional Loans Vs. FHA Loans
Conventional loans have stricter credit requirements than FHA loans. FHA loans, which are backed by the Federal Housing Administration, offer the ability to get approved with a credit score as low as 580 and a minimum down payment of 3.5%.
While conventional loans offer a slightly smaller down payment, you must have a credit score of at least 620 to qualify.
With an FHA loan a potential home buyer can:
- Get into a home with as little as 3.5% down
- Get into a home with a minimum credit score of 500
- Use gift money to fund 100% of the purchase
- Use down payment assistance funds to finance the purchase
When you’re deciding between a conventional loan and an FHA loan, it’s important to consider the cost of mortgage insurance. Conventional loans require borrowers to pay for mortgage insurance if their down payment is less than 20%. However, if you can put down 20% you will never have to pay PMI.
On the other hand, FHA loans require mortgage insurance regardless of the down payment amount. When you take out an FHA mortgage you’ll pay an up-front mortgage premium, plus a monthly premium.
If you put less than 10% down on your FHA mortgage, that monthly mortgage insurance premium will stay on your mortgage bill for the length of your loan, regardless of how much equity you have.
What Kind of Properties Can I Buy with a Conventional Mortgage?
Conventional loans can be used for a wide range of different types of properties. Some of the properties you finance with a conventional mortgage include:
- Single-family homes
- Planned Unit Developments
- 2-, 3-, and 4-unit properties
Conventional loans can also be used to purchase a second home or a rental. In fact, it’s one of the very few mortgage programs that can accommodate vacation or investment properties. However, the interest rates and down payment requirements will usually be higher.