With so many loan options out there, trying to find the right one for you may feel like a tough task. It’s critical that you do your research and find the best mortgage option that suits your needs. Here to help the best we can, this blog is all about conventional loans and how they may be the borrowing solutions you’ve been searching for.
What is a Conventional Loan?
Any loan or mortgage that is not backed or offered by a government entity is considered a conventional loan. Conventional loans are offered by institutions such as banks, mortgage companies, and credit unions. Although conventional loans are not backed by government agencies, there are a couple of exceptions. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), are a couple of government-backed entities that can guarantee conventional loans in some instances.
How do Conventional Loans Differ from Government-Backed Loans?
Conventional loans often appeal to borrowers with good credit and low debt-to-income ratios. Those who can afford 20% as their down payment tend to benefit the most from conventional loans. When a home buyer can make a down payment of 20%, this can avert their need to pay for private mortgage insurance (PMI). Additional benefits of conventional loans include the following:
- Low monthly cost with higher down payments
- No PMI with down payments of 20% or more
- PMI can be removed once you reach 20% equity
- Term Flexibility
- A minimum credit score of 620
Often compared to FHA loans, conventional loans differ in comparison to government-backed loans in several ways. To see exactly how conventional loans stack up against FHA loans, visit here. Other government-backed loan options include Veteran Affair (VA) loans and U.S. Department of Agriculture (USDA) Loans. While these mortgage options offer perks and benefits for qualified individuals, when it comes down to deciding on whether or not you should choose a conventional loan, it ultimately depends on your financial situation.
Understanding Conventional Loans
It’s not uncommon for conventional loans to be referred to as conforming loans. While the two are related, they both have their distinct characteristics. Conforming loans are a type of conventional loan and are generally compared with nonconforming loans. As all conforming loans are conventional, not all conventional loans qualify as conforming.
The major difference between Conforming and non-conforming loans is the loan limit. A conforming loan is a mortgage that has terms and conditions that meet the criteria that are provided by Fannie Mae and Freddie Mac. The intentions here are that these loans will be sold to one of those agencies. On the other hand, a non-conforming loan is one that is not bought by Fannie Mae or Freddie Mac. Non-conforming loans break down into a few categories, government loans, jumbo loans, and everything else in that nature.
How to Qualify for a Conventional Loan?
If you’re beginning to think that a conventional loan may be the right mortgage solution for you, the next step is to figure out if you’re qualified. Unlike government-backed loans, conventional loans have more lenient requirements you must meet before you can apply. Ideally, anyone who has a credit score equal to or higher than 620, established credit, and a solid financial backing may qualify for a conventional loan.
While conventional loans have their advantages and benefits, everyone has their own unique home buying needs. If you’re someone who can has a credit score above 620 and can afford to make a down payment of 20%, this may be the best loan option for you. It’s essential that you work with your lender to help you find the best mortgage solution that can help you purchase your dream home.
If you have additional questions about conventional loans or anything regarding the mortgage process, reach out to one of our mortgage experts today!
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 05/29/2020.