A conventional mortgage or loan is any type of home buyer’s loan that is not offered or secured by a government entity, such as an FHA loan, VA loan, or the USDA Rural Housing Service, but instead is available through private lenders, banks, credit unions, mortgage companies or the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
This is a type of loan that is the closest to a standard mortgage. When people are thinking about acquiring a mortgage, they are actually thinking about a conventional loan. People usually wonder if they qualify for a conventional loan. There are no specific eligibility requirements and most, if not all, lenders offer those loans. The buyer qualifies if they have at least a credit score of 620, a debt-to-income ratio lower than 43%, and puts down at least a 3% down payment. Due to the wide availability and low payment rates, these types of mortgages are the most popular in the United States. Practically 3 in 5 buyers use a conventional mortgage when buying a home or trying to refinance a property. Conventional mortgage lenders can set their own requirements and rates, as long as they fall within the conforming loan limits set by Fannie and Freddie.
People who are looking for a certain type of mortgage typically wonder if it is better to use a conventional loan or an FHA (Federal Housing Administration) Loan. To answer that, it really depends on the buyer’s circumstances in life. FHA loans are great for low to average credit. These types of loans allow credit scores starting at just 580 with a 3.5% down payment. But specific eligibility requirements include FHA mortgage insurance, which is always required. Conventional loans are often better if they have great credit, or plan to stay in the home for years to come. With credit having to be at least 620, you can get a Conventional loan with just a 3% down payment. The mortgage insurance can be canceled later on. Another important requirement to buy an FHA loan is to have a debt-to-income ratio of about 50%. The right loan for a specific buyer depends on the home buying goals and what they qualify for.
Lastly, even though it depends on specific circumstances, many people wonder why it is best to buy a conventional loan out of the multiple types of mortgage options available. A conventional loan is a great option if the buyer has a solid credit score and little debt. If they are unable to make large payment upfront, conventional loans are available with a down payment as low as 3%, as mentioned previously. In most cases, borrowers save money in the long run with a conventional loan because there’s no upfront mortgage insurance fee and the monthly insurance payments are cheaper typically. Other benefits of a conventional loan include if the buyer has a down payment that is at least 20%, they can avoid paying private mortgage insurance, they can typically borrow more than they can with an FHA loan. Mortgage rates are typically lower for conventional loans than FHA loans. Again, it depends on financial situations and the desires of the buyer in the long run of owning a home on whether or not they choose a conventional loan or not. However, most people would not disagree about wanting to save more money in the long haul.