What Are Conventional Loans?

If you’re been shopping around for a new house and looking for a mortgage to help make ends meet, you’ve probably heard a bunch of different terms thrown away. Odds are, you’ve probably heard of a conventional loan, but what exactly is this sort of loan?

A conventional loan is a mortgage that is not backed by any Government agency, such as the Federal Housing Administration (FHA) or Veterans Administration (VA). Conventional loans meet the lending requirements of Freddie Mac and Fannie Mae, the two largest buyers of mortgage loans in the country. Most conventional mortgages are issued by private lenders who then sell the loan to one of these Government Sponsored Entities (GSE’s).

Here are a few Conventional Loan Requirements:

Credit: The minimum credit score requirement is typically between 620-640 depending on the lender.
Income: Income will be verified by reviewing recent paycheck stubs, tax returns and W2s. Debt-to-income ratio must not exceed 43%.
Occupancy: Conventional loans can be used to finance a primary residence, a second home, vacation property or a rental property. This is in contrast to government-backed loan programs which can only be used to finance a primary residence.
Assets: Bank and investment statements will be verified to ensure the borrower has sufficient assets to close. These funds must be able to cover a down payment plus associated closing costs.
Property Type: Single-family homes, duplexes, 2-4 unit properties, condominiums and townhouses are eligible.

Conventional Loan Pros

Higher loan limits than FHA
Adjustable-rate and fixed-rate loan terms available
No private mortgage insurance (PMI) with 80% loan-to-value ratio
Available for second homes and investment properties
PMI cancels when the LTV reaches 78%
Lower PMI rates than FHA Conventional 97 with 3% down

Conventional Loan Cons

Credit score requirement is higher than FHA (minimum 620-640)
Higher down payment requirement (5%-20%)
Qualifying guidelines are more strict
Low income borrowers may not qualify

A conventional loan may be a good fit for you if you…

Have a minimum FICO credit score of 620
Have a 20% down payment
Want to avoid PMI by putting at least 20% down
Have a high income (low debt-to-income ratio)
Need a loan amount that is above the FHA loan limit

Down Payment Guidelines

There are no standard down payment guidelines for conventional financing. The minimum down payment is usually between 5% – 20% of the sales price.

The conventional 97 loan offers 97% financing, requiring just a 3% down payment.

Conventional mortgage loans with less than a 20% down payment and the mortgage is greater than 80% of the value of the home a private mortgage insurance policy is required.

A private mortgage insurance policy, or PMI, is an insurance policy that compensates the lender the difference between the 80% threshold and the amount of down payment should the loan ever go into default.

Conventional vs FHA Loans

FHA Loan Advantages

Easier to qualify for because of their low credit score and down payment requirements
Require just a 3.5% down payment making them an attractive option for first-time home buyers
Borrowers with a 580 credit score may qualify with just a 3.5% down payment
Higher DTI ratios accepted making them better for low-income borrowers

FHA Loan Disadvantages