Finding a home that you want to buy is often easier said than done.
When you add the process of securing a mortgage, it’s natural to wonder if you’ll ever make any progress.
Fortunately, when you know what you’re looking for in a home and how you’ll pay for it, everything will begin to come together.
While there’s more than one type of mortgage to consider, a conventional loan is the most common. Below, we share everything you need to know about using a conventional mortgage to purchase your next property.
What is a conventional loan?
A conventional loan, or conventional mortgage, isn’t guaranteed by a government agency, such as the Department of Veterans Affairs or Federal Housing Administration. Instead, this type of mortgage is provided by financial institutions to well-qualified borrowers.
Conventional mortgage requirements are more strict than loans that are backed by a government agency, as the lender is assuming all of the risk. Here’s what you need to know:
- Down payment: Depending on your financial circumstances, you may be able to purchase a home with as little as three percent down.
- Private mortgage insurance: If you don’t make a down payment of 20 percent or more, you’re required to pay private mortgage insurance.
- Credit score: A minimum credit score of 620 is generally required to qualify for a conventional mortgage.
- Debt-to-income ratio: In most cases, lenders want your debt-to-income ratio to be 50 percent or lower.
- Loan size: For 2022, the maximum amount of money you can borrow through a conventional mortgage is $647,200. Note: areas of the country with a higher cost of living have higher loan limits.
If everything checks out with the five requirements above, you’re in a position to apply for and secure a conventional loan.
Conventional loan vs. government-backed loan
Both types of loans allow you to purchase a home, but there are many differences that make these unique.
The first thing you need to know is that lenders can offer both conventional and government-backed loans. They don’t have to choose one or the other. Consulting with a lender can help you better understand the differences, pros, and cons of each type.
A government-backed loan is insured by a federal agency. With this insurance, the lender is not on the hook if the borrower fails to repay the loan. Instead, the government steps in to take the “financial hit.” The government does this to promote homeownership among a larger number of people.
A conventional mortgage isn’t backed by a government agency, thus making it riskier for the lender. They’re on the hook if the borrower neglects to repay the loan. That’s why they may have stricter qualifications for approval than other loan programs.
What are the advantages of a conventional loan?
Find out what loan is best for you
The conventional 30-year mortgage is still the most popular among homebuyers. Let’s look at the benefits.
- It can be used for many types of purchases: For instance, you can use a conventional for an investment property, vacation home, or first home. Furthermore, jumbo loans are available if you’re purchasing a more costly property.
- No program fees: Government-backed mortgage loans generally have program-specific fees. For instance, a VA loan has a funding fee ranging from 1.4 to 2.3 percent, based on your down payment. That’s in addition to any other fees associated with the loan.
- The ability to get rid of private mortgage insurance: If you make less than a 20 percent down payment on a conventional loan, you’re required to purchase private mortgage insurance. This protects the lender if you default. On the plus side, you can request that your lender cancels this insurance once your principal loan balance reaches 78 percent of the property’s value. The mortgage insurance premium on an FHA loan typically lasts until you pay it off.
These are among the biggest advantages of a conventional mortgage, but you’re likely to find more as you discuss your situation with a qualified lender.
Types of conventional loans
There is more than one type of conventional loan, which makes it easier to find the perfect fit for your current situation and short and long-term goals.
Generally speaking, there are two types of conventional loans:
- Fixed rate: Your interest rate remains the same for the life of your loan.
- Adjustable rate: Your interest rate starts lower but only remains the same for a predetermined period of time, usually three or five years before adjustments.
The three most basic types of fixed rate mortgage are 15-year, 20-year, and 30-year.
Questions for your lender
With this information guiding you, it’s time to contact a lender to ask questions and learn more about what comes next. Here are some questions to add to your list:
- Can you explain the eligibility requirements for a conventional loan?
- What fees are associated with conventional loans?
- Can you explain the pros and cons of both fixed rate and adjustable rate mortgages?
- Do I qualify for a government-backed loan?
- How long does it take to receive a conventional loan preapproval?
- How long does a preapproval last?
- What is the process of applying for a conventional mortgage?
If you need answers to these questions — among others — you’re in the right place.
At AAA Banking, our loan officers are experienced, knowledgeable, and ready to help you purchase your dream home.
Contact us online to set up an appointment today!
Photo by Ketut Subiyanto