For many homebuyers, a conventional loan offers an attractive financing option. Conventional loans are the most common non-government backed mortgages. They provide more flexible qualifying guidelines than FHA or VA loans, allowing those with good credit and down payments to obtain competitive interest rates. This guide will cover what constitutes a conventional loan, their benefits and drawbacks, eligibility and down payment requirements, and tips for securing the best rate on a conventional mortgage.
What is a Conventional Loan?
A conventional loan refers to any mortgage not backed by a government entity like the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA). The key features include:
- Not government insured – private lending institutions bear default risk
- Generally issued by private banks, credit unions, or mortgage lenders
- Must meet standards to be purchased by Freddie Mac or Fannie Mae
- Typically require higher credit scores and down payments than government loans
While options like FHA and USDA loans fill an important role, conventional loans serve many home buyers with good credit and down payment funds available.
Benefits of a Conventional Loan
Conventional mortgages offer some key advantages:
Potentially Lower Interest Rates
Having good credit means qualifying for lower interest rates from lenders compared to government-backed loans. This saves significantly on financing costs over the life of the loan.
Lower Mortgage Insurance Requirements
Conventional loans with 20% down payment do not require private mortgage insurance (PMI). With less than 20% down, PMI eventually terminates when equity reaches 20%.
Flexible Qualifying Guidelines
Income and debt-to-income ratios can be higher than more restrictive FHA loan requirements. This allows more buyers to qualify.
Options for Non-Occupant Co-Borrowers
Non-occupant co-borrowers like parents are allowed to help qualify for the loan while not living in the home.
No Government Recertification
No annual recertification required as with some program mortgages. Home values and incomes don’t have to be re-verified.
May Require Less Upfront Costs
Conventional loans allow negotiable seller contributions to closing costs within limits. This helps reduce out-of-pocket expenses.
For borrowers who can qualify, conventional financing offers several advantages over government-backed FHA and VA loan options.
Potential Drawbacks of Conventional Loans
Of course, conventional mortgages also come with some potential disadvantages:
- Require higher credit scores than government loan programs. Minimum scores often around 620.
- Typically require larger down payment of at least 5-20%. This can be a barrier for some first-time home buyers.
- Have stricter debt-to-income limits than FHA loans.
- Do not allow 100% gift funds for down payment like VA loans.
- May have higher interest rates than VA mortgages, depending on credit score.
While they have more flexible qualifying criteria than government loans, conventional mortgages do require stronger credit profiles and down payments to obtain the best terms.
Conventional Loan Eligibility
While specific underwriting requirements will vary by lender, here are typical eligibility criteria:
- Minimum credit score of 620, with scores of 700+ recommended for best terms
- Stable income history to document ability to repay the mortgage
- Monthly mortgage payment limited to 28% of gross monthly income
- Total debt obligations limited to 36% of gross monthly income
- Sufficient savings to cover down payment amount and closing costs
Meeting these criteria helps ensure qualification for a competitive interest rate. Having funds for an even larger down payment or higher credit score than the minimums can further reduce rates.
Down Payment Options and Requirements
Down payment requirements depend on the type of conventional loan:
Conforming Loans
- Must be under conforming loan limit (typically $647,200)
- Minimum down payment is typically 5% – 20%
Jumbo Loans
- For loan amounts above conforming limits ($647,200+)
- Minimum down payment usually 10% – 20%
Low Down Payment Programs
- Conventional loans with 3% – 5% down options
- Generally require private mortgage insurance (PMI)
Having at least 20% down prevents the need for PMI which can save substantially on a monthly basis.
Tips for Securing the Best Conventional Loan Rates
These tactics can help you qualify for the lowest rates when seeking a conventional mortgage:
- Shop multiple lenders to compare rate quotes and fees. Even small differences in rates can have big impact over a 30 year home loan.
- Work to improve your credit score. Every 10 points above 740 can lower rates incrementally. Pay down debts and resolve any credit issues.
- Make a larger down payment if possible. 20% down provides the most competitive pricing and avoids PMI.
- Lower your debt-to-income ratio. Pay down revolving balances and loans.
- Look for discount points options. Buying down the interest rate by paying points upfront can be advantageous if staying in the home long-term.
- Check published average interest rates and aim for below average offers.
- Get preapproved early once you start house hunting. This locks in rates for up to 90 days.
With good credit and sufficient funds for down payment and closing costs, a conventional loan is an attractive mortgage option for many buyers. Shopping thoroughly allows you to secure competitive interest rates for your situation.
Final Thoughts
Conventional loans offer flexible qualifying guidelines for borrowers with good credit profiles compared to government-backed mortgage broker Houston. For home buyers with sufficient income, down payment funds, and lower debt levels, conventional financing provides an appealing route to home ownership with competitive interest rates and terms.
