Conventional Loans

Conventional Loans

When you're just starting the mortgage application process, you may be confused about all of the options you have. A conventional mortgage loan is the right choice for many people.

A conventional mortgage is offered by a bank and is not insured by the federal government. This makes it a slightly higher risk for the bank, so the qualifications are more strict. A conventional loan may require a higher down payment or a lower debt to income ratio. Like other types of mortgages, the interest rate you pay is based on your credit score and down payment or amount of equity. A conventional mortgage could have a fixed rate or a variable interest rate.

Down Payment

The biggest difference between a conventional mortgage and other mortgage programs is the required down payment. Government-backed mortgages have low down payment requirements to help home buyers move into a home and are often easier to qualify for. For example, you could get an FHA mortgage with just 3.5 percent down and a VA mortgage with no down payment. Banks have different requirements for the down payment on a conventional mortgage, ranging from 5 to 20 percent.

Conforming vs. Non-Conforming

Conventional loans can be either conforming or non-conforming. If it's conforming, it will be for an amount under a specified maximum. In most areas, this is $417,000 for a single family home, but the amount is higher in certain areas and when you are purchasing a multi-family home. Non-conforming mortgages are for loan amounts over $417,000, usually called a jumbo loan.

Advantage of Conventional Mortgage

When you make a down payment of less than 20 percent of the value of the home, Fannie Mae and Freddie Mac will require you to purchase private mortgage insurance or get a second lien if you have a conventional mortgage. (If you have another type of mortgage, you have to pay a mortgage insurance premium.) These are similar fees, but in the conventional mortgage, you do not have to pay this once you reach 20 percent equity in your home.

You may be eligible for a Conventional Loan if...

  • You have debt-to-income ratio of 28-45
  • You have a credit score of 620 or above
  • You have 5-20% down payment