What is a Conventional loan ?
A conventional loan is a type of mortgage loan that is not backed by a government agency such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA). Instead, conventional loans are offered and funded by private lenders such as banks, credit unions or mortgage companies.
The main difference between conventional loans and government-backed loans is that conventional loans usually require higher credit scores and larger down payments. Borrowers may need a credit score of at least 620 to qualify for a conventional loan, although some lenders may require higher scores. Additionally, borrowers may be required to make a down payment of at least 3% of the purchase price of the home.
How does a Conventional loan work ?
A conventional loan is a type of mortgage that is not guaranteed or insured by the government. Instead, conventional loans are backed by private lenders, such as banks or mortgage companies.
To qualify for a conventional loan, borrowers typically must have good credit, a steady income, and a down payment of at least 5% to 20% of the home’s purchase price. The exact requirements of a conventional loan can vary depending on the lender and the type of loan.
Once approved, borrowers can use a conventional loan to buy or refinance a home. The loan will usually have a fixed or adjustable interest rate, and borrowers will make monthly payments over a set period of time, usually 15 to 30 years.
Unlike government-backed loans such as FHA or VA loans, conventional loans do not require mortgage insurance for borrowers who put down more than 20%. However, borrowers who put down less than 20% may be required to pay private mortgage insurance (PMI) to protect the lender in case of default.
Overall, conventional loans can be a good option for borrowers with strong credit and a solid financial profile who are looking to buy or refinance a home.
Types of Conventional loans
There are several types of conventional loans you may encounter when you compare lenders and mortgage options. Here are some of the most common and how they work.
A conventional loan is a type of mortgage loan that is not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Conventional loans are offered by private lenders and are subject to their own guidelines and requirements.
There are two main types of conventional loans:
- Conforming loans: These are conventional loans that meet guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and securitize mortgages. Conforming loans typically have lower interest rates and more favorable terms than nonconforming loans. Types of Conforming loans–
- Fixed-rate mortgages
- Adjustable-rate mortgages (ARMs)
- Interest-only mortgages
- Cash-out refinances
- Home equity loans and lines of credit
- Non-conforming loans: These are conventional loans that do not meet the guidelines set by Fannie Mae and Freddie Mac. Non-conforming loans are also known as jumbo loans and are often used to finance high-end properties or homes in expensive markets. Nonconforming loans typically have higher interest rates and more stringent underwriting requirements than conforming loans. types of Non-conforming loans –
- Jumbo loans
- Portfolio loans
- Non-QM loans
- Alt-A loans
- Subprime loan
Benefits of conventional loan
There are many advantages of conventional loans, through which you can take better advantage of conventional loans, all of which are as follows:
- Low interest rates: Conventional loans generally have lower interest rates than other types of loans, such as FHA or VA loans.
- Flexibility: Conventional loans offer more flexibility in terms of loan amount, repayment terms and eligibility criteria as compared to government backed loans.
- No Mortgage Insurance: If a borrower puts at least 20% of the home’s purchase price down, they can avoid paying private mortgage insurance (PMI), which is required for most government-backed loans.
- No upfront funding fee: Conventional loans do not require an upfront funding fee, which is required for VA loans, or an upfront mortgage insurance premium (MIP), which is required for FHA loans.
- Faster processing times: Conventional loans can often be processed more quickly than government-backed loans, as they do not require as much documentation or verification.
- No property restrictions: Conventional loans have no asset restrictions or limits, so they can be used to finance a wide range of assets, including investment properties and second homes.
How Do I Qualify For A Conventional Loan
o qualify for a conventional loan, you will typically need to meet the following criteria:
- Good credit: Most lenders require a credit score of at least 620 for a conventional loan, although some may require a higher score depending on the loan type and other factors.
- Stable income: Lenders will want to see that you have a steady source of income and that your debt-to-income ratio (DTI) is within an acceptable range. Generally, your DTI should not exceed 43% of your monthly income.
- Down payment: You will need to make a down payment of at least 3% to 20% of the purchase price of the home, depending on the loan type and other factors.
- Employment history: Lenders will want to see that you have a stable employment history and that you have been employed in the same field or industry for at least two years.
- Property appraisal: The property you want to buy should be appraised by a licensed appraiser to make sure it is worth the purchase price.
- Other requirements: Lenders may have additional requirements, such as minimum loan amounts, minimum and maximum loan-to-value ratios, and other criteria that vary depending on the lender and loan type.
It’s important to shop around and compare loan offers from multiple lenders to find the best terms and rates for your situation. Be prepared to provide documents such as tax returns, pay stubs and bank statements to support your application.