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Conventional Loans

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A conventional loan is a mortgage loan that's not backed by a government agency. These loans come in all shapes and sizes, and while they don't provide some of the benefits as FHA, VA and USDA loans, conventional loans remain the most common type of mortgage loan. According to the National Association of Home Builders, conventional loans accounted for 78.5% of new home sales in the first quarter of 2022. If you're thinking about buying a home, here's what you should know about conventional loans to get an idea of whether it's the right fit for you.

How a Conventional Mortgage Works

Conventional loans are originated, backed and serviced by private mortgage lenders like banks, credit unions and other financial institutions. Conventional loans are broken down into conforming and nonconforming loans, depending on whether they conform to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Loan Amounts

Conforming conventional loans go as high as $647,200 for single-family homes in 2022 ($970,800 if you live in a designated high-cost area). If you want a bigger loan than that, you'll need a jumbo loan.

Credit Score Requirement

It's possible to get approved for a conforming conventional loan with a credit score as low as 620, although some lenders may look for a score of 660 or better.

Down Payment Requirement

You can find conventional mortgage loans with a down payment requirement as low as 3%, and some lenders have special programs that offer up to 100% financing. However, if you don't put down 20% or more, the lender typically requires you to pay private mortgage insurance.

Interest Rates

You can get a fixed-rate loan or an adjustable-rate loan. Your interest rate will largely depend on your credit score and overall credit history. The better your credit is, the less you'll pay in interest over the life of the loan.

Loan Terms

Conventional loans are typically repaid over a 30-year term, but it's possible to qualify for a 15- or 20-year conventional mortgage loan.

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Frequently Ask Questions

Government-insured mortgage loans have special features that can make them a good fit for certain homebuyers. Here's a quick summary of each option and who might consider it:
  • FHA loans: An FHA loan is open to applicants with credit scores as low as 500 if you have a 10% down payment, or 580 if you have a 3.5% down payment.
  • VA loans: A VA loan doesn't require a down payment or mortgage insurance but is designed only for select members of the military community, their spouses and other beneficiaries.
  • USDA loans: USDA loans have no down payment requirement and can help low- to moderate-income homebuyers who want to purchase a home in an eligible rural area.
Note that while these loans are insured by various government agencies, it's private lenders that offer them to borrowers—the same lenders that also offer conventional loans.

If you're trying to decide between a conventional loan and a government-insured loan, the right one for you depends on your financial situation. While government-backed loans offer perks if you don't have great credit or a sizable down payment, qualifying for one is not always easy. Additionally, you may save more money with a conventional loan if you have good credit or can put more money down. Compare the different options and their benefits and drawbacks to find the right loan program for you.
There's no right mortgage loan for everyone, so it's important to know both the benefits and drawbacks of each of your options before you choose.
Here are some of the benefits you'll get from a conventional loan:
  • Low Costs:A high credit score can help you qualify for a low interest rate. Plus, you can request to have the insurance requirement removed once your loan-to-value ratio reaches 80%. In contrast, the mortgage insurance premium that comes with an FHA loan may remain for the life of the loan, and the same goes for the guaranteed fee on a USDA loan.
  • Higher Loan Limits:While conforming loans do have limits, you can go even higher with jumbo conventional loans if you need to. You may not get that kind of flexibility with government-insured loans.
  • Flexibility for Some:Private mortgage lenders have more flexibility with conventional loans than they do with government-insured loans, primarily because they don't need to follow the guidelines set by those government agencies.
Along with some of the benefits of getting a conventional loan over a government-backed one, there are also some disadvantages to consider:
  • Higher credit score requirements: You typically need credit scores of at least 620 to qualify for a conforming conventional loan, which is higher than what some government-backed loans require.
  • Higher down payment requirements: Some conventional loan programs allow you to put down 3% or even nothing at all if you're a first-time homebuyer but expect to pay 5% after that. In contrast, FHA loans require a minimum down payment of 3.5%, and USDA loans and VA loans have no down payment requirement at all.
  • Stricter qualifying guidelines: Government-insured mortgage loans place less risk on the mortgage lender, so it may be easier to qualify for one of those, if you meet the agency's eligibility requirements. With a conventional loan, on the other hand, your personal financial situation may be scrutinized more closely because the lender is taking on more risk by originating the loan.