A conventional home loan, sometimes also referred to as conventional mortgage or conforming loan, is a type of home buyer’s loan that is not guaranteed or insured by a government entity, such as the Federal Housing Administration (FHA), the US Department of Veteran Affairs (VA), or the USDA Rural Housing Service (RHS).
Conventional home loans are available through private lenders, including mortgage companies, banks, and credit unions and must conform to the guidelines established under the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
As the name suggests, conventional home loans are loans chosen by a majority of home buyers because they offer the best interest rates and loan terms, which usually result in a lower monthly payment.
Types of Conventional Home Loans
This type of conventional home loan have the same interest rate for the entire loan period. This means that the amount of the monthly payment remains the same, year after year, no matter how long or short the chosen loan period is.
Adjustable rate mortgage (ARM) loans, unlike fixed rate loans, have an interest rate that may change or fluctuate over time, depending on economic shifts. Typically, the interest rate remains fixed for a certain period, and then switches to an adjustable rate. For example, the interest rate of a 10/1 30-year ARM loan is fixed for 10 years before it adjusts for the remaining 25 years.
To qualify for a conventional home loan, borrowers must meet the following requirements:
- Credit Score: Minimum requirement is typically between 600 and 650, depending on the lender. If a borrower has a higher credit score, the better chances of them to qualify.
- Property Type: Single-family, multiple units (2-4), duplexes, vacation homes, condominiums, rental properties, and town homes are eligible. This is in contrast to government-backed loans (FHA, VA, and USDA) that can only be used to finance a primary residence.
- Income: Recent pay checks, tax returns and W2s are verified. Ideally, debt-to-income ratio should not exceed 43%.
- Assets: Bank and investments statements will be evaluated to ensure that the borrower has ample funding to cover the down payment and associated closing costs.
- Down payment: Depending on the credit score, borrowers may be required to make a down payment ranging between of 3% to 20% of the sales price.
Benefits of Choosing Conventional Loans
Lower Private Mortgage Insurance
When taking a home loan, borrowers are required to pay for mortgage insurance as part of the loan agreement. A mortgage insurance protects the lender in case the borrower defaults or is unable to pay the loan due to death, disability, or any other reason. Typically, borrowers will not be required to pay for a mortgage insurance if they can afford to make a 20% down payment. Mortgage insurance can be paid in lump sum at closing or in monthly or annual payments.
Flexible Repayment Schedule
Borrowers may choose among different loan periods, including 10, 15, 20, 25, 30, or 40 years, depending on their financial capacity. The shorter the repayment schedule, the lower the interest rate.
Since there’s no need to get an approval from government entities, conventional home loans are processed more quickly than VA or FHA loans.
Getting approved for a conventional home loan can be easy if borrowers have a good credit rating, have an acceptable debt-to-income ratio, and if they can make a down payment of at least 20%. However, it is always a good option to talk to a mortgage broker for guidance on the qualification process.