Conventional Loan
What is a Conventional Loan?
There are 2 types of conventional loans: conforming loans and non-conforming loans.
Conforming loans follow the rules made by the Fannie Mae and Freddie Mac companies. These rules include factors such as maximum loan amount, borrower income, credit standards, and down payment.
The maximum loan amount is the highest amount of money that you can borrow for a mortgage.
When a conventional loan goes over the maximum loan amount allowed by Fannie Mae and Freddie Mac, this is called a non-conforming loan or jumbo loan. These loans have higher interest rates compared to conforming loans
Conventional Loan Requirements
- You need good credit to qualify for a conventional loan, with the minimum being 620.
- It can be harder to get approved if you have a higher DTI. The maximum allowed DTI varies depending on other factors such as available assets but is still generally lower than an FHA loan.
- Generally, the required down payment is the standard range of 5% to 20%. If you put down less than 20% for a conventional loan, you have to pay monthly mortgage insurance premiums.
Benefits to Conventional Loans
Conventional loans can be a great option for borrowers who have good credit, a low debt-to-income ratio, and the savings needed for a down payment. A credit score of at least 720 can help borrowers get a better rate on their conventional loan.
In addition, borrowers who qualify for conventional loans can get a larger loan amount, which gives them the freedom to purchase a higher-priced home. Another major advantage to this loan type is that it comes with lower fees that will automatically be eliminated from the mortgage payment as you hit equity milestones. This is a great benefit because you do not have to refinance or sell your home to lower your mortgage payment!
Like other mortgage types, the conventional loan factors in your debt-to-income ratio, also known as the DTI. The DTI measures how much of your monthly income goes into paying off debts (credit cards, student loans, etc).
One of the best ways to prepare for a home purchase is to lower your monthly bills as much as possible by not using credit cards, keeping your current car for longer and reducing unnecessary purchases. The lower your DTI, the better chances you have of getting approved.
Some conventional loans can provide you with financing for your dream home with a down payment as low as 3%, but most people find that a downpayment of 5% to 20% gives them a more manageable monthly mortgage payment. If you choose to put down less than 20% mortgage insurance will be needed but can be reduced by the amount down and other factors like credit and DTI.
To learn more about the differences between conventional loans and FHA loans, click here.
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