The Lowdown on Conventional Mortgage Loans
Conventional mortgages make up most of all home loans in the U.S., and it’s the one most borrowers think of when they think of mortgages. It’s what you might think of as a traditional, garden-variety mortgage, but that doesn’t mean it doesn’t have its strengths – there are a lot of benefits to this type of loan. So, what exactly is a conventional loan and what’s advantageous about it?
A conventional mortgage is not backed or guaranteed by a government agency, such as loans from the VA (Veterans Administration loan), USDA (United States Department of Agriculture loan) and FHA (Federal Housing Administration). But many conventional loans still conform to guidelines set by government-sponsored enterprises, such as Fannie Mae and Freddie Mac, because these agencies ultimately buy the mortgages from the lenders and must ensure the loans come with lower risks. Some lenders also offer non-conforming loans, which don’t conform to government agency guidelines and thus may have unique characteristics that make their rates a bit higher.
So What Are the Benefits of Conventional Loans?
- Widely available at most lenders, with no special eligibility requirements to qualify, such as a VA Loan only being offered to veterans or active-duty military.
- Generally speaking, conventional total loan limits are higher and allow for larger home purchases. The new 2022 base loan limit will be $647,200. You can still borrow more than the limit, but you will have to apply for a jumbo loan.
- Down payments as low as 3% allow more borrowers to realize their dreams of homeownership. Private Mortgage Insurance (PMI) can be avoided with down payments of 20% or more.
- Loan processing may be faster because there are no additional government eligibility requirements.
- Flexible repayment plans.
- Fewer fees than with some government loans (lenders can set their own fees for conventional loans). At AmeriSave, for example, our conventional loans have no loan origination fees.
- Ideal for borrowers with a strong credit history and a good down payment, as they can qualify for lower interest rates, including both fixed-rate or adjustable-rate (ARM) loans. (Add to that, AmeriSave already offers competitively low conventional mortgage rates.)
- First-time homebuyers can benefit from conventional loans, though those with lower credit scores might consider a first-time home buyer program, which provides options for assistance with closing costs and your down payment. You can also learn about smart alternatives to putting 20 percent down on a home that can help cut initial costs.
- A viable option for borrowers making repeat purchases and those buying second homes or investment properties.
Conventional Home Loan Requirements
Specific approval guidelines must fall within some of the requirements set by Fannie and Freddie but otherwise can vary from lender to lender. Some of AmeriSave’s general requirements for conventional loans include:
- A 620 minimum credit score
- Minimum down payment of 3% for first-time homebuyers (has not owned a home in the last 3 years) or 5% otherwise.
- A recent full exterior and interior home appraisal
- Continuation of your current job throughout the entire loan process and no major purchases, such as a new vehicle.
How to qualify
Conventional loans work well for borrowers with stable, full-time income. Those who are self-employed borrowers can also qualify if it’s clear their income is reliable and expected to continue. Check out our guide to getting a mortgage when self-employed to learn more about what you need for home financing. In fact, even if your financial situation is one that has you wondering if you could qualify, there is flexibility in conventional loan programs that makes them worth pursuing. Conventional loans are a great pathway to homeownership for borrowers with solid credit and lower down payment amounts. And as with any mortgage, the better your financial health, the better loan rate options you have access to.
Keep in mind that you’re required to buy private mortgage insurance (PMI) if you’re unable to make a 20% down payment, so run the numbers on how much this will add to the cost of the loan each year. PMI on conventional loans depends on the down payment. The more you pay down, the lower the PMI, so there are benefits to putting down a higher down payment.
If you find that you’re on the cusp of being an ideal conventional loan borrower, look at several different home loan options and, as always, shop around and get personalized rate quotes that reflect your situation, not just that of the average borrower. Like all mortgage rates, conventional rates can change quickly as the markets change. It’s a good idea to keep your eye on interest rate trends so you can be informed – and so you can be ready to lock in when rates drop. Our article on mortgage interest rates gives a comprehensive overview on how rates work and finding the best options when looking to buy a home. With a mortgage rate lock, your interest rate won’t change between the offer and the closing.
Do you still have questions about conventional loans? Contact us by phone or chat and an AmeriSave loan originator will be happy to answer your questions. Our experienced staff can walk you through potential interest rates, terms and closing costs, and then help you decide whether the ever-popular conventional loan is right for you.