Conventional Home Loans

Conventional Mortgage Loan

A conventional mortgage or conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity, such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service, but instead is available through or guaranteed by a private lender (banks, credit unions, mortgage companies), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Conventional loans are often erroneously referred to as conforming mortgages or loans. While there is overlap, the two are distinct categories. A conforming mortgage contains underlying terms and conditions that meet the criteria of Fannie Mae and Freddie Mac. While all conforming loans are conventional, not all conventional loans qualify as conforming. Currently, conventional mortgages represent around two-thirds of the homeowners’ loans issued in the U.S.

Interest Rates

Conventional loans’ interest rates tend to be higher than those of government-backed mortgages, such as FHA loans. FHA loans usually mandate that borrowers pay mortgage-insurance premiums which are financed into the loan amount. Conventional loans do not finance additional money into the loan amount.

Who Is Likely to Qualify for a Conventional Loan

People with established credit, higher scored credit reports, and who are on a solid financial footing usually qualify for conventional mortgages. More specifically, the ideal candidate should have:

  • A credit score of at least 680 and, preferably, well over 700. The higher the score, the lower the interest rate on the loan, with the best terms being reserved for those over 740.
  • An acceptable debt-to-income ratio (DTI) (the sum of your monthly obligations compared to your monthly income). That number is around 36% and no more than 43%.
  • A down payment of at least 20% of the home’s purchase price readily available
  • Minimum of 5% down payment. Lenders can and do accept less, however, private mortgage insurance might be included with the mortgage payment. These payments cease once the borrower achieves 20% equity in the house.
  • A 3% down payment program is available to those that meet the income limits for the area in which the home is located.
  • In addition, conventional mortgages are often the best or only recourse for homebuyers who want the residence for investment purposes or as a second home or who want to purchase a property priced over $500,000.

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