Everything you need to know about Conventional loans
Do you have dreams of buying your first home? Are you a current homeowner looking to upsize, downsize, or move to a different town altogether? Conventional home loans make it possible for many Americans to afford houses that would otherwise be too expensive for them. If you have a stable income and a decent credit score, then a conventional loan will put you within reach of your dreams for a new home.
What is a "Conventional" Loan?
The definition of a conventional loan is any mortgage loan that is not backed or insured by a government entity.
Government-backed loans like USDA loans, FHA loans, and VA loans are available to some based on certain qualifications, but conventional loans are the most common type of mortgage loan for borrowers to obtain.
The purchase price of a home is often far higher than what buyers can bring to the table upfront. A home loan allows them to still purchase that home as long as they can pay back the cost of the home plus interest. Mortgage lenders will gauge the risk of a loan by evaluating buyers to determine whether or not they will be able to pay the amount back. Conventional loans are not backed by an official government agency, so you need to have a reliable financial status to receive this mortgage loan.
What About FHA Loans and VA Loans?
Since these loans are insured or subsidized by the government, they are only available to certain groups. A VA loan is provided by a mortgage lender and backed by the Department of Veterans Affairs. Active-duty service members, veterans, and surviving spouses can obtain a VA loan, which does not require private mortgage insurance but does include a VA funding fee. FHA loans are insured by the Federal Housing Administration. An FHA loan is for buyers that may have more limited income or a lower credit score, making it difficult to find affordable conventional loans. FHA loans require a credit score of 580. The main difference between borrowers of conventional and FHA loans is income level.
Types of Conventional Loans
Within this category, there are multiple types of mortgage loans. They are differentiated based on the loan amount, loan limits, and other factors. Here are the main mortgage loan categories that are still considered conventional.
Conforming Loans
Conforming loans are those that fall within the base conforming loan limit that is set by Fannie Mae and Freddie Mac. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are non-government agencies that are regulated by the Federal Housing Finance Agency. These two organizations are the main drivers of the mortgage loan market. A conforming conventional loan is any conventional mortgage that is below the $726,200 loan amount limit, (as of 2023, some markets may differ).
Non-Conforming Loans
Loan amounts that are beyond that limit or are not backed by Fannie Mae and Freddie Mac. This includes mortgages that are above $726,000, but it also includes government-insured loans like VA loans or FHA loans. Nonconforming loans that are conventional have much higher loan limits.
Jumbo Loans
A jumbo loan is a name for a mortgage that is conventional but higher than the limit set by Fannie Mae and Freddie Mac. Jumbo loans are considered too risky by these entities since so much money is involved, making the potential for a loss to lenders increase. Plus, Jumbo loans have a far lower demand.
What Affects Conventional Loan Applications?
If you believe that you are in the market for a conventional loan, then it is time to start learning about the qualifications, contributing factors, and typical loan terms and loan limits.
Credit Score
Your credit score is one of the most important factors when applying for a conventional mortgage. Credit scores are an indication of the individual’s ability to pay off debts. If you have a positive credit history of making on-time payments and not accruing too much debt like auto loans or high credit card balances, then you will have a higher credit score. This credit score will allow you to access better interest rates and lower mortgage insurance monthly payments. Typically, the minimum credit score for a conforming loan is 620, though multiple lenders make exceptions to this rule. If your score is 720 or above, you have a great chance of scoring a lower interest rate.
Mortgage Insurance
The down payment directly affects whether or not you have to pay a mortgage insurance premium. If the down payment is less than 20%, then you will probably face mortgage insurance premiums, though some exceptions may apply. Private mortgage insurance protects the lenders in case a borrower defaults, which is more likely if a smaller down payment was made.
Interest Rate
Speaking of interest rates, they will impact your loan agreement as well. As mentioned above, better credit scores result in lower interest rates on a conventional loan. It proves that you are a reliable person when paying debts, so mortgage lenders can feel confident that you will not default. The interest rate is a percentage of the total loan amount that the borrower pays on top of the home purchase price. This is how lenders make money on loan transactions. Typically, the earlier years of a loan term are used to pay off mostly interest, while the principal will be paid in larger chunks as time goes on. A fixed-rate loan locks in the interest rate at signing for the lifetime of the loan. Fixed-rate mortgages are ideal for moderate-income borrowers who want to ensure their mortgage payments will be consistent.
Down Payment
The down payment amount that you can bring to the table plays a big role in the type of conventional home loan that you can acquire. The size of the down payment will affect mortgage insurance payments, the size of the monthly payment, the total amount of the loan, and even the life of the loan. The minimum down payment for most conforming conventional loans is 3.5%, so make sure you can afford that number before you start shopping for conventional mortgages.
Learn About Conventional Loan Requirements from District Lending
If you are in the market for a single-family home to be your primary residence but do not need government loans, then contact District Lending to find out if you qualify for a conventional loan. We can talk through the monthly mortgage payment and down payment you can afford, conventional loan programs, credit scores, debt-to-income ratio, and more to determine what conventional mortgages you could obtain.
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