Conventional Loans Explained
You've probably heard the term conventional loan but what you probably didn't know is that conventional loans come in many different forms which provide buyers various options when they decide to purchase a new home. Buyers have many choices when they choose to take out a mortgage to buy a house including FHA, VA, USDA, conforming and non-conforming conventional loans. Below, we will explain what makes a conventional loan different from other options and why you might consider one versus a government-backed loan.
What Is a Conventional Loan?
Simply put, a conventional loan is not insured or guaranteed by the federal government. Instead, conventional loans are backed by private lenders, and the borrower will pay any insurance requirements.
Conventional loans remain more common compared to government-insured homes loans; approximately 70% of all loans are some form of a conventional mortgage product.
Conventional loans typically provide a home buyer more flexibility and options compared to government-insured loans, although they tend to carry higher qualification requirements including a higher credit score and more substantial down payment to avoid PMI (Private Mortgage Insurance).
Why a Conventional Loan?
Conventional loans come with more flexibility compared to government-insured home loans. This includes:
- Low down payment, typically 3% is the minimum down payment required
- In some cases, lower interest rates compared to government-insured loans
- Variable term options including 10, 15, 20, 25, and the most common 30-year terms
- On average, lower PMI requirements though anytime your loan to value is higher than 80% you can expect to pay for PMI
Compared to government-insured loans, conventional loans tend to offer buyers more options that may better match their loan term goals.
Different Types of Conventional Loans
There are two types of conventional loans, conforming and non-conforming.
Conforming conventional loans conform to the guidelines set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation. Fannie and Freddie are government-sponsored enterprises that purchase conforming mortgages from lenders.
The minimum guideline for a loan to be considered conforming is the amount. Each year Fannie and Freddie establish loan limits for every area of the country, any loans that exceed those limits are no longer considered conforming.
A non-conforming conventional loan no longer conforms to the guidelines set by Fannie and Freddie; these loans exceed the loan limits.
For example, the loan limit in Cowlitz County for 2019 is $314,827, Clark County $474,950, Lewis County $314,827, Wahkiakum County $314,827, and Pacific County $314,827.
Qualifying for a Conventional Loan
Nearly every mortgage broker and a bank can offer you a conventional mortgage product. The type of conventional loan will vary depending on:
- Credit score, on average the minimum score is 620
- Down payment, while the average down payment on a conventional loan is 10%, some conventional loans will offer as little as 3% down.
- Proof of income, a lender will verify your income with pay stubs, tax returns, and bank statements
- Job history, a good and stable employment history will also factor into your qualification for a conventional loan
How to Apply for a Conventional Loan
Nearly every mortgage broker or bank will offer some conventional loan product although the available terms will vary. For example, one lender may provide a conventional loan with 3% down while another may require 5% or more down. Or one may expect a minimum credit score of 620 while another may only offer conventional loan products with a minimum score of 650.
Mortgage brokers tend to offer a wider range of available conventional loan products since they're able to broker out their loans which provide for more loan options. Banks, on the other hand, are limited to the loan products they offer.
Local Mortgage Brokers, Apply Online
Are you ready to begin the home buying process? Your first step is to get pre-qualified for a home loan. Many buyers get excited about buying a new house and decide to start looking first, knowing what you can afford will help your home search by narrowing down houses that fit within your budget. Here are a few local Mortgage Brokers for you to consider:
- Kristi Barber, Academy Mortgage
- Angelina Rice, Life Mortgage
- Karla Martin, Life Mortgage
- Chris Jacobs, Life Mortgage
Do you have more questions about conventional loans or home mortgages? We'd be happy to help, just complete the form below and we will be in touch soon.