Conventional loans are a popular mortgage option, even for first-time home buyers. But it may surprise you to learn there’s more than one type of conventional loan.
Keep reading to learn more about the main types of conventional mortgage products, and what their differences might mean for you.
What is a conventional home loan?
A conventional loan is any type of home loan that isn’t insured or guaranteed through a government agency. Many conventional loans conform to government-set loan limits as well as income and credit score minimums. Conventional loans often cost less than government-backed mortgages such as FHA loans, but qualification requirements are more difficult to satisfy.
» MORE:Study up on conventional mortgage basics
Common Types of Conventional Loans
1. Conforming conventional loans
If a conventional loan is less than the maximum loan amount set by the Federal Housing Finance Agency and meets additional loan standards set by Fannie Mae or Freddie Mac, it’s called a conforming loan. Because Fannie and Freddie are government-sponsored enterprises, you may also hear conforming loans referred to as “GSE loans.”
2. Nonconforming conventional loans
If a conventional loan exceeds FHFA loan limits or uses underwriting standards that are different from those set by Fannie Mae and Freddie Mac, it’s called a nonconforming loan. A jumbo loan is a common type of nonconforming conventional loan. You may need a jumbo loan to finance more than $484,350 in most U.S. counties.
Whether they’re conforming or nonconforming, all mortgages require you to pay interest. With a fixed-rate conventional loan, the interest rate stays the same for as long as you have the mortgage. Many buyers choose a 30-year fixed-rate conventional loan because it usually results in an affordable monthly payment, but shorter terms are also available.
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The alternative to a fixed-rate mortgage is an adjustable-rate mortgage, or ARM. Conventional loans with adjustable rates, also known as hybrid ARMs, have rates that may go up or down over time. ARM rates usually adjust annually, after an initial fixed-rate period of three, five, seven or 10 years.
5. Low-down-payment conventional loans
There was a time when getting a conventional loan required a 20% down payment. Because borrowers who meet this requirement only have to finance 80% of the home’s value, it's often referred to as an “80/20 conventional loan.” But conventional loan down payment requirements have since become more flexible.
3% down payment
HomeReady and Home Possible are conventional mortgage options that allow down payments as low as 3% — sometimes referred to as "3 down conventional loans." If you qualify for a 3% down payment through one of these programs, you’ll need to finance the other 97%. That’s why you may hear them referred to as “conventional 97 loans.”
5% down payment
Borrowers with lower credit scores might be required to make a down payment of 5% or more to get a conventional loan, meaning they’d need to finance 95% of the home’s value. This is sometimes referred to as a “5 down conventional loan” or a “conventional 95 mortgage.”
Zero down payment?
If you're wondering “Can I get 100% conventional loan financing?,” the answer is yes, but it may be hard to find. Some lenders — often credit unions — offer in-house, nonconforming conventional mortgage programs that feature 100% financing, but special qualification requirements often apply. Be aware that zero-down-payment mortgages are risky: It will take you longer to build equity than someone who makes a down payment, and you’ll pay more interest as a result.
» MORE:Do you meet conventional loan requirements?
6. Conventional renovation loans
It can be hard to find the perfect house in your budget. Buying a fixer-upper is one way to achieve home ownership when prices are high or move-in-ready inventory is low.
The CHOICERenovation loan and HomeStyle loan are two types of conventional mortgages that allow you to finance a home purchase, as well as the necessary renovations, at the same time.
Not sure what type of loan is right for you? Use the tool below to help you find out.
Is an FHA or conventional loan better? A conventional loan offers more advantages than an FHA loan if you have good credit (around 680 or higher) and at least 3 percent down. However, if your credit score is in the high-500s or low-600s, an FHA loan might be a more affordable option.
See if your lender offers piggyback loans: A piggyback loan, also known as an 80/10/10 or combination mortgage, takes the form of two loans: one for 80 percent of the home's price, the other for 10 percent of the home's price. You'll then pay 10 percent as a down payment. The upside: You won't pay PMI.
A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs). Conventional loans can be conforming or non-conforming.
There are drawbacks to conventional loans, the main one being that you'll typically need stronger finances to qualify. Conventional loans usually have larger down payment requirements and you'll need a higher credit score compared to government-backed mortgages.
Many home buyers think they need 20% down for a conventional loan. But that's far from true. Conventional loan down payments start at just 3% for first-time home buyers. Or, you could pay 5%-10% out of pocket to lower your interest rate and payments.
Some buyers may believe that FHA loans are for first-time home buyers and conventional mortgages are for more established buyers. However, both types of loans have their advantages for any buyer, though qualification requirements differ.
Because conventional loans have stricter approval standards, sellers may automatically believe a buyer with a conventional loan is in a better financial position to purchase their home.
An FHA loan is a mortgage backed by the Federal Housing Administration. This type of loan uses lower interest rates and less strict credit score requirements. Conventional loans are not backed by a government agency and often use conforming loan limits.
If you take out a conventional mortgage and you can pay 20% or more on the down payment, you can effectively avoid being required to take out PMI along with your mortgage.
If you have a high credit score, a conventional loan can give you access to the best rates and the most flexible loan terms on the market. For buyers with lower scores or less cash to bring to the table, though, it's worth exploring government-backed loan options.
Because they don't come with this kind of insurance, conventional mortgages generally have stricter eligibility requirements. You'll need a higher credit score, lower debt-to-income ratio, and more money for a down payment.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and private mortgage insurance (PMI) costs will decrease. But an FHA loan can be perfect if your credit score is in the high 500s or low 600s. For lower-credit borrowers, FHA is often the cheaper option.
Conventional loans can require less paperwork and can be obtained more quickly than government-insured loans. Mortgage lenders can approve conventional loans without the typical delays incurred with FHA or government-backed loans.
Sellers often prefer conventional mortgages because they usually offer lower interest rates and the qualification requirements can be more lenient than those of an FHA loan. Additionally, with conventional loans, sellers may not have to pay private mortgage insurance or other upfront costs associated with an FHA loan.
Even though a conventional loan is the most common mortgage, it is surprisingly difficult to get. Borrowers need to have a minimum credit score of about 620 in order to qualify—the highest minimum score of all mortgage products—and have a debt-to-income ratio of 43% or less.
Question: Why do many borrowers prefer conventional mortgages? Because they include taxes and insurance in the monthly mortgage payment, so homeowners don't have to worry about paying these items separately.
A conventional mortgage is a home loan not backed by a government agency such as the FHA, VA, or USDA. Lenders often sell conventional loans to Fannie Mae or Freddie Mac, which are government-sponsored enterprises (GSEs) that help make mortgage financing available.
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