Conventional Home Loan

What is a Conventional Home Loan?

If it’s your first time buying a home, you’ll quickly come to find that mortgage loans come in many shapes and sizes. Typically, they fall into two categories government-backed loans and non-government-backed loans.

Conventional loans are the latter; they’re underwritten by a set of standards laid out by government mortgage issuers Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored enterprises (commonly referred to as the “GSEs” or “Agencies”) created by acts of Congress to enhance the flow of credit to specific sectors of the American economy by providing public financial services to facilitate borrowing for a variety of individuals.

Even though conventional loans are underwritten according to the Agency guidelines, they are not insured the way FHA or VA loans are. Meaning that the lender takes on the bulk of responsibility. That’s why conventional loans are a little harder to qualify for than other types of loans and require private mortgage insurance with a down payment of less than 20%.

The majority of loans funded today are conventional loans because the provide the best interest rates and other benefits.

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Conventional Loan Requirements

Conventional loans are generally made to borrowers who have a stable employment history and have good credit, minimal debt, and ample savings because of all the requirements to obtain this loan type. Some are first-time homebuyers, but most have owned a home before and have built up a solid credit history through consistent mortgage payments and have a sizable down payment from the equity they got from selling their previous home.

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Here are some of the qualifications for getting a conventional loan:

  • Proof of a steady income
  • Credit score of 620 or higher
  • DTI of less than 45%
  • At least a 3% conventional loan down payment
  • Private mortgage insurance required with a down payment of less than 20%

Larger down payments are likely required for borrowers with lower credit scores and/or debt-to-income (DTI) ratios that are on the higher end. Putting down 20% will eliminate the private mortgage insurance requirement. Keep in mind that with a conventional mortgage, there are limits on how much you can borrow. Those limits vary by region and change annually. In 2021, the conventional loan limit is $548,250 with an expanded high balance option up to $822,375.

Conventional Loan Benefits

Many people strive to better their credit situation and finances in order to obtain a conventional loan, since the process is not as rigorous as qualifying for a government-backed loan. With lesser stringent guidelines, the overall process of obtaining conventional financing is generally faster and easier than government loans.

Some additional benefits of taking out a conventional loan include:

  • Cheaper monthly payments
  • Low interest rates (for good credit scores)
  • The elimination of private mortgage insurance (PMI) with 20% down payment
  • The option to put as little as 3% down
  • Private mortgage insurance is required with a down payment of less than 20%
  • No upfront mortgage insurance fee
  • Diversity of loan program and term length options
  • Availability for all types of properties including investment (rentals) and second homes
  • Fixed or adjustable rate
  • More liberal standards for the property

For borrowers with lower credit scores who may not qualify for conventional financing, the benefits listed above can serve as a motivation for positive change.

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Conventional Loan Options

People come from all walks of life seeking home loans, and because no two people have the same financial situation, there are several conventional loan types.

Conforming/non-conforming conventional loans

The Federal Housing Finance Agency has set maximum loan amounts for conventional mortgages, and Fannie Mae and Freddie Mac have set additional standards. If a conventional loan is less than the maximum and meets the financing limits, it’s known as a conforming loan. Non-conforming loans are ones that exceed the loan limit. They’re also called “jumbo loans.” These loan types usually carry higher interest rates because of the higher risk that they carry. They require a minimum conventional loan down payment of 20% and qualification is more of a challenge.

Fixed-/adjustable-rate conventional loans

As you know by now, any loan you’re after will require you to pay interest in exchange for borrowing the funds. However, not all loans stay at the same rate over time; this is the difference between a fixed rate and adjustable rate. The interest rate of adjustable-rate loans may fluctuate over time with the market. These are good for short-term homeowners or people who expect to refinance after their income increases. Fixed-rate mortgages have locked-in interest rates that will remain the same over the life of the loan. They’re ideal for borrowers who want the peace of mind knowing their payment will be consistent month over month.

Low-down-payment conventional loans

Conventional loans are much more flexible than they used to be; they no longer require you to pay 20% down. Low-down-payment conventional loans allow you to pay 5% or even as little as 3% down if you’re willing to take on a higher interest rate. Note: private mortgage insurance is required when making a down payment of less than 20%.

Not sure how to choose a mortgage loan? Get in touch with the team at Mission Loans.

How to Apply for a Conventional Loan

If you feel like you’re in a position to take on a conventional loan and buy your first house or the home of your dreams, there are several ways to get started. You can email us for more information, fill out our contact form, or call us directly to begin loan shopping with one of our friendly team members. Mission Loans can’t wait to help you make your home dreams a reality!

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