As one of the most popular mortgage options on the market, Conventional Loans offer flexibility and competitive rates that meet the needs of many of today’s homebuyers. Continue reading to understand the benefits, requirements, and key features of conventional financing.
What is a Conventional Loan?
A conventional loan is a type of mortgage not insured or guaranteed by a government agency (unlike FHA, VA, or USDA Loans). Instead, these loans follow guidelines set by private entities like Fannie Mae and Freddie Mac.
Conventional loans are a great fit for borrowers with stable income and solid credit scores.
Conforming vs Non-Conforming Loans
Conforming Loans: These are conventional loans that stay within the dollar limits set by the Federal Housing Finance Agency (FHFA)
Non-Conforming (Jumbo) Loans: If you need to borrow more than the local conforming limit allows, the loan is considered “Non-Conforming” or a Jumbo Loan. These typically require higher credit scores and larger down payments.
How Do You Qualify?
While every lender has slightly different standards, the general requirements for a conventional mortgage include:
- Credit Score: A minimum score of at least 620 is typically required.
- Debt-to-Income Ratio (DTI): Your monthly debt payments should ideally be below 36% – 43% of your gross monthly income.
- Down Payment: You can secure a loan with as little as 3% down.
- Employment: A stable two-year work history is standard.
Flexible Terms and Rate Options
Conventional loans aren’t “one size fits all.” You can customize your loan structure based on your financial goals.
Fixed-Rate Mortgages: Your interest rate stays the same for the entire life of the loan (common terms include 15, 20, or 30 years).
Adjustable-Rate Mortgage (ARMs): These usually offer a lower initial interest rate for a set period of time (like 5 or 7 years) before the rate adjusts based on market conditions.
The Truth About Down Payments and PMI
One of the biggest myths in real estate is that you must have a 20% down payment for a conventional loan. This is false. You can purchase a home with as little as 3% down. However, if you put down less than 20%, you will be required to pay Private Mortgage Insurance (PMI).
Pro Tip: Unlike FHA loans (where mortgage insurance often lasts for the life of the loan), PMI on a conventional loan can be cancelled once you reach 20% equity in your home. This can save you hundreds of dollars a month down the road!
Your Loan Application Checklist
Ready to apply? Having your paperwork organized will speed up your approval. To get started, you will generally need:
- Income Proof: Pay Stubs from the last 30 days and W-2s/ Tax Returns form the past two years.
- Asset Documentation: Bank statements from the last two months.
- Identification: A valid government-issued ID (Driver’s License, Military ID, State-Issued ID, or Passport)
- Additional Documentation may be Requested
Is a Conventional Loan Right for You?
Conventional Loans are an excellent option for buyers looking for competitive interest rates, flexible terms, and the ability to eliminate mortgage insurance.
Not sure if you meet the credit score requirements or have questions about local loan limits? Contact us today and we will help you find the perfect loan to meet your homeownership goals!
