What is a Conventional Loan?
A conventional loan can be offered by almost any mortgage company, bank, broker, or credit union. It is a mortgage that is not insured or guaranteed by the federal government (FHA and VA loans, for example, are federally insured). Most conventional loans fit the criteria laid our by Fannie Mae or Freddie Mac.
Am I Eligible?
In order to qualify for a conventional loan, borrowers must typically meet three basic requirements:
1. Down Payment
The standard down payment for a conventional loan is anywhere between 5% and 25% of a home’s value depending, on the borrower’s credit and financial condition. For example, a $100,000 home would require a $20,000 down payment. However, depending on a lender’s unique specifications, a borrower may be able to put down as little as 3% at closing. Just keep in mind, this option is typically only available to those with exceptional credit and financial profiles.
To qualify for a conventional loan, your monthly mortgage payments and monthly non-mortgage debts must fall within certain ranges. For example, your monthly mortgage payments (which may include taxes and insurance) may not exceed 40% of your gross monthly income. In addition, your monthly mortgage payments, when combined with your other monthly debt payments (car loans, student loans and credit card bills), may be limited to a maximum of 45% of your gross monthly income. These requirements are only guidelines and may fluctuate depending on your specific credit and financial profile.
3. Credit Score
Your credit score also plays an integral role when qualifying for a conventional loan. In fact, most lenders require a minimum FICO credit score of around 620 to obtain approval. And, keep in mind, if you plan on making a down payment of less than 20%, you may need a FICO credit score greater than 700.
What Does It Mean to Me?
Which type of loan you ultimately receive may be driven by factors that may not be in your control – such as FICO scores and other factors described above. However, if you have the option to choose your loan type, there are some differences that may be important depending on your financial situation. For example:
Mortgage Insurance Premium
It’s more likely that you can avoid MIPs with conventional loans than with government insured loans, largely because conventional loans require higher down payments. Even with conventional loans, some lenders may still require MIP depending on your profile, the value of the home and other factors. However, private mortgage insurance can often be obtained at a lower cost than with government-insured loans.
Private lenders may compete for your business if you are deemed a good credit risk because of income, credit score and other factors. Because of this, you may be able obtain a more attractive interest rate.
Conventional loans are offered through private lenders and the fees are not set by the government. This means the fees can vary widely among lenders – not necessarily a bad thing since you might save money.
Is a Conventional Loan Right For You?
The bottom line is that conventional loans, in the past, were really only available to borrowers with good credit and available cash for down payments. Underwriting guidelines continue to change on a daily, weekly or even monthly time frame. Make sure to talk with your Loan Officer about all of your options. If you are fortunate to be an attractive borrower, than you might have the ability to obtain a loan at a lower cost and have it processed faster than with a government insured loan.