What Is a Conventional Mortgage Loan?

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conventional mortgage

Around 23% of home sales close through cash deals. However, the rest require loans.

So, most people need mortgage loans to buy homes, yet there are many types, leaving homebuyers confused. If you’re confused about loan types, you might want to consider learning about the various types.

What is a conventional mortgage? One of the best types is a conventional mortgage. If you discover that you qualify for this loan type, you might want to learn what that means.

Here is a guide to help you learn the answer to this vital question.

A Conventional Mortgage Is a Conforming Loan

Mortgage loans come in many types, and conventional loans fall into the conforming loan category. A conforming loan meets the mortgage loan criteria designed by Freddie Mac and Fannie Mae.

These two organizations have been around for many years, and the U.S. Congress created them. These organizations buy mortgages, but they only purchase conforming loans.

As a result, they purchase conventional mortgages, but they don’t purchase most other types because other types fail to meet the necessary criteria.

For example, when banks issue conventional loans, they might decide to sell them when they need to liquidate. If a bank has conventional loans, they can easily sell them on the secondary market because they’re conforming loans.

Banks can’t sell nonconforming loans the same way, making non-conforming loans less liquid.

Conventional Loans Don’t Have Government Backing

The second feature of conventional loans is they don’t have government backing. Government backing protects the lenders who issue loans, and two standard loans that fall into this category are FHA loans and VA loans.

The Federal Housing Administration (FHA) backs FHA loans. This means that a lender can file a claim with the FHA if a borrower defaults on their loan. The FHA protects the lender by compensating them for their losses.

The same is true with VA loans, which have governmental backing from the Department of Veteran’s Affairs.

On the flip side, conventional loans don’t have any backing. So while Freddie Mac and Fannie Mae might purchase these loans when banks want to sell them, these entities won’t bail out borrowers when they default.

As a result, conventional loans inherently have more risk to lenders than other loan types. As you’ll see later in this article, lenders must take extra steps to protect themselves for this reason.

You Can Use Them More Freely for Purchasing Properties

Conventional loans work well for most types of home buying purchases. However, other loan types have more restrictions on the types of properties you can purchase.

For example, if you want to buy a house with a USDA loan, the house must possess and meet specific qualities and characteristics. If the house you want to purchase doesn’t have these, you can’t use a USDA loan to buy it.

As you prepare for the buying process of a house to live in, a second home, or a rental property, you can consider using a conventional loan. Of course, you must meet the lender requirements to qualify.

They Have Higher Requirement Standards

Lenders always review a person’s financial information before approving or rejecting an application when you apply for a loan.

The most vital thing to know about conventional loans is that the standards are higher than with other loan types. Of course, every lender sets their own standards, but here are some standards you might have to meet:

Down Payment Amount

The down payment needed for a conventional loan varies, but you might qualify for the loan if you have at least 3% down. Lenders generally ask for 10% to 20% down, depending on a person’s financial situation, but it varies.

Credit Score

Most lenders require a credit score of at least 620 for conventional loan approval. However, lenders generally want scores of around 740 or higher. You can discuss the credit score requirements with your lender.

You might also want to find out your score before applying for a conventional loan.

Debt-to-Income Ratio

Lenders also analyze applications by calculating the borrower’s debt-to-income (DTI) ratio. This ratio tells lenders how much a person can afford to repay each month.

Most lenders spend time reviewing, analyzing, and evaluating a person’s overall financial situation before approving a conventional loan because they have risks with issuing these loans.

You Might Pay Private Mortgage Insurance

The next thing to know about a conventional mortgage loan is that you might have to pay for mortgage insurance each month.

Private mortgage insurance (PMI) is insurance that protects the lender. A borrower pays PMI only when their loan-to-value (LTV) is too high.

LTV refers to how much money you borrow when buying a house compared to the home’s value. If you borrow more than 80% of the home’s value, you’ll likely have to pay PMI.

As a result, you can eliminate paying PMI by putting more money down. For example, if you can put at least 20% down on your purchase, your lender won’t require PMI.

They Offer Competitive Terms and Rates

The final thing to know about conventional loans is that they offer competitive terms and rates.

You can choose the duration for your conventional loan from several options, including 10-year, 20-year, or 30-year loans. Additionally, you can choose from fixed-interest rates or variable rates.

Finally, you can compare the current mortgage rates of conventional loans to other loan types to see that they’re about the same. Therefore, you’ll receive a competitive interest rate with a conventional loan if you qualify for one.

Ready to Buy a Home? Get Preapproved First

A conventional mortgage is a great option if you qualify for one. If you’re unsure about whether you meet the requirements, you can talk to a lender to find out.

Feel free to contact us at 7th Level Mortgage. We operate in New Jersey and offer expert advice and assistance to people who want to purchase homes with loans.

At 7th Level Mortgage, we are an experienced team of mortgage professionals based out of New Jersey and serving the east coast from Pennsylvania to Florida, including Delaware and Maryland. We have won numerous awards for our excellent professional work and reputation with clients for being extremely diligent, accessible, and hands-on throughout the entire mortgage process.