If you’re in the market for a new mortgage, you’ve probably considered a conventional loan. Sometimes called ‘conforming loans’, conventional loans are an increasingly popular choice thanks to low rates and increasingly flexible guidelines. Especially good for first-time borrowers with decent credit, conventional loans appeal to a wide variety of people. If you’re new to mortgages, here’s a quick breakdown of the conventional loan.
What is a Conventional Loan?
By definition, a conventional loan is simply one that is not backed by the federal government. Sounds a bit scary, right? If there’s no federal government to back the loan, why are they so popular? What’s the catch?
The truth is there really isn’t a catch when it comes to conventional loans. Instead of being backed by the government, the loan is backed by a private entity.
Now that you know a little bit about conventional loans, how do you qualify?
Qualifying for a Conventional Loan
Simply put, all you have to do to qualify for a conventional loan is to match the expectations set out by Fannie Mae and Freddie Mac (in fact, they’re called ‘conforming loans’ because they almost always conform to Fannie Mae and Freddie Mac loan standards). If you can do that, congratulations, you’re now part of the 65% of the real estate market that make up conventional loan homeowners! It sounds easy enough, but these conventional loans have a reputation for being hard to get because there is no implicit government guarantee.
So, what are these standards?
In general, you need to prove you make enough money, that your income is expected to continue, you have enough assets to cover the down payment, and that you have an adequate credit history. While it sounds easy enough, making sure that your finances fit each category can make for a stressful time.
Keep in mind that these standards change quite frequently, vary by each lender, and also vary by location. You may need to do a little research to see if you fit Fannie Mae and Freddie Mac’s standards in your area.
The Pros of a Conventional Loan
So, why choose a conventional loan instead of say a government backed loan? Let’s take a look at the pros and cons of a conventional loan.
- Loan amount up to $484,350 ($726,525 in high cost areas)
- No up-front PMI
- Most properties accepted
- A ton of different private lenders
- Zero down payment with 20% down
- Cheaper PMI than FHA
- Conventional 97 Loans require 3% down
So, what exactly does that mean? Well, in short, conventional loans are a smart choice for those who know they won’t remain in their house long term. Since most adjustable rates are fixed, the homeowner pays ultra-low interest and can save thousands. The problem, however, is that if the homeowner doesn’t sell by the end of that period, the rate will adjust, possibly up.
Another interesting advantage of a conventional loan is that there is a lack of an upfront mortgage insurance fee. Government loans, including FHA and VA loans, both require an upfront “funding” fee, usually between 1% and 3% of the loan while conventional loans have no fees.
The Bottom Line on Conventional Loans
The bottom line on conventional loans is that they can potentially be a great loan. Today’s rates are very low, but you could always find an even lower rate if you be patient and shop around. We always recommend getting an eligibility check to see if a conventional loan or another type of loan is right for you. When it comes down to it, if you’re a prospective homeowner, first-time and repeat buyers can land a great value if you choose a conventional loan for your home purchase, and you’d be surprised at how many loans you can actually qualify for with your credit.