Conventional Loans

Conventional loans are mortgage loans that are not insured or guaranteed by a government agency (like FHA, VA, or USDA loans). They are offered by private lenders such as banks, credit unions, or mortgage companies and typically follow guidelines set by Fannie Mae and Freddie Mac. These loans are ideal for borrowers with good credit and a stable financial background.

Key Features of Conventional Loans:

1. Down Payment Requirements:

• Minimum down payment: Typically, conventional loans require at least a 3% to 5% down payment, though a 20% down payment is often recommended to avoid private mortgage insurance (PMI).
• No PMI with 20% down: If you can make a 20% down payment, you won’t have to pay for PMI, which is required for down payments less than 20%.

2. Credit Score Requirements:

• Higher credit score: Conventional loans generally require a credit score of at least 620. However, to get the best interest rates, borrowers typically need a score of 700 or higher.

3. Loan Limits:

• Conventional loans have conforming loan limits set by the Federal Housing Finance Agency (FHFA). In 2024, the standard loan limit for most areas is $739,000, though higher limits apply in more expensive housing markets.
• Jumbo loans: If the loan exceeds the conforming limits, it's considered a jumbo loan, which often comes with stricter credit and income requirements.

4. Private Mortgage Insurance (PMI):

• If your down payment is less than 20%, you will need to pay for private mortgage insurance (PMI). PMI protects the lender in case you default on the loan.
• PMI can be removed once your equity reaches 20%, either by paying down the loan or through home appreciation.

5. Fixed and Adjustable-Rate Options:

• Fixed-rate mortgage: The interest rate stays the same for the life of the loan, providing consistent monthly payments.
• Adjustable-rate mortgage (ARM): The interest rate may start lower but can adjust over time based on market conditions, potentially increasing or decreasing after an initial fixed period.

6. Loan Terms:

• Conventional loans typically come in 15-year or 30-year terms. The 30-year option is the most common, offering lower monthly payments but with more interest paid over time. A 15-year loan has higher payments but allows you to build equity faster and pay less in interest overall.

Benefits of Conventional Loans:

• No upfront mortgage insurance: Unlike FHA loans, conventional loans don't require upfront mortgage insurance premiums.
• Flexible property types: Conventional loans can be used for various property types, including single-family homes, condos, second homes, and investment properties.
• Potentially lower interest rates: Borrowers with high credit scores and strong financial profiles can often secure lower interest rates.
• PMI cancellation: Once you have 20% equity, PMI can be canceled, lowering your monthly payment.

Drawbacks of Conventional Loans:

• Stricter requirements: Borrowers generally need a higher credit score and a lower debt-to-income ratio (DTI) compared to FHA or VA loans.
• PMI for low down payments: If you can't make a 20% down payment, you’ll need to pay PMI until your loan balance reaches 80% of the home’s value.
• Higher down payment: While you can make a down payment as low as 3%, the lack of government backing means conventional loans can require a higher down payment for some borrowers.

Who Should Consider a Conventional Loan?

• Borrowers with good to excellent credit: If you have a solid credit history and financial profile, conventional loans offer flexibility and potentially better rates.
• Those with a 20% down payment: If you can avoid PMI, a conventional loan can save you money in the long run.
• Buyers of investment properties or second homes: Conventional loans allow for these types of purchases, unlike many government-backed loans.