Let’s take a look at how conventional loans compare to some other popular loan options.
Conventional Loans Vs. VA Loans
While conventional loans are available to anyone who can meet the requirements, Department of Veterans Affairs (VA) loans are a benefit of military service and are only available to veterans, active-duty servicemembers and their surviving spouses.
First, VA loans don’t require a down payment. Second, VA loans never require you to pay mortgage insurance.
If you’re thinking about getting a VA loan instead of a conventional loan, here are a few things to consider:
You can’t use a VA loan to buy a second home. The Department of Veterans Affairs requires that VA loan holders occupy the home they purchased with a VA loan. Second homes and vacation homes are not allowed through VA loans.
You’ll have to pay a funding fee. The VA funding fee offsets the cost to taxpayers of getting the VA loan. Certain groups are exempt from paying the funding fee. The funding fee ranges from 1.25% to 3.3% of the loan amount and varies based on your down payment, whether you’re buying a home or refinancing and how many times you’ve used your VA loan benefit.
Conventional Loans Vs. FHA Loans
Conventional loans have stricter credit requirements than FHA loans. FHA loans, which are backed by the Federal Housing Administration (FHA), offer the ability to get approved with a credit score as low as 500 with a 10% minimum down payment. Credit scores above 580 (which many lenders require as your minimum qualifying score – including Rocket Mortgage®) only require a minimum down payment of 3.5%. While conventional loans allow you to make a slightly smaller down payment of 3%, you must have a credit score of at least 620 to qualify.
When you’re deciding between a conventional loan versus an FHA loan, it’s important to consider the cost of mortgage insurance. If you put less than 10% down on an FHA loan, you’ll have to pay a mortgage insurance premium for the life of the loan – regardless of how much equity you have.
However, you won’t have to pay private mortgage insurance on a conventional loan forever if you make a down payment of 10% or more. In that case, the mortgage insurance premiums will be canceled after 11 years.
Conventional Loans Vs. USDA Loans
While conventional loans are available in all areas of the country, United States Department of Agriculture (USDA) loans* can only be used to purchase properties in qualifying rural areas. Those who qualify for a USDA loan may find that it’s a very affordable loan compared to other loan options. Although Rocket Mortgage doesn’t offer USDA loans currently, we’re providing this information to you to help you understand all of your choices for mortgages.
There’s no maximum income for a conventional loan, but USDA loans have income limits that vary based on the city and state where you’re buying the home. When evaluating your eligibility for a USDA loan, your lender will consider the incomes of everyone in the household – not just the people on the loan.
USDA loans don’t require borrowers to pay private mortgage insurance (PMI), but they do require borrowers to pay a guarantee fee, which is similar to PMI. If you pay it upfront, the fee is 1% of the total loan amount. You also have the option to pay the guarantee fee as part of your monthly payment. The guarantee fee is usually more affordable than PMI.
The length of most conventional loans is 15, 20 or 30 years. To qualify, you will need a good credit score. The minimum score to be approved can vary from lender to lender, but a score of 620 is usually what you will need to be approved, and a score of 740 will help you secure the best rate possible.
A conventional mortgage is a home loan that is not insured by a government agency (like FHA, VA, and USDA loans). Conventional loans can be either conforming or non-conforming. Conforming loans have a balance under the “conforming” loan limit for the county.
Down payment: While 20 percent down is the standard, many fixed-rate conventional loans for a primary residence allow for a down payment as small as 3 percent or 5 percent. Private mortgage insurance (PMI): If you put down less than 20 percent, you'll have to pay PMI, an additional fee added to your payments.
As noted above, conventional loans tend to have lower closing costs (and be cheaper in general) than government-backed options. However, the downside of conventional loans is that they don't offer as much flexibility to help you avoid paying those costs upfront.
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.
The minimum down payment requirement for a conventional loan is 3% of the loan amount. However, lenders may require borrowers with high DTI ratios or low credit scores to make a larger down payment. Even if it's not required, if you're able to make a higher down payment, you may want to consider doing so.
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. Borrowers also need to be able to afford a down payment of 20% or more in order to avoid mortgage insurance.
Common reasons can include credit issues, insufficient income, high debt-to-income ratio, employment history concerns, or issues related to the property itself.
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.
From application to approval and closing, getting a mortgage can take anywhere from 30 days to 60 days. However, some home purchases can take longer, depending on factors unique to the purchase transaction and the home loan processing time.
It is a common misconception that in order to obtain a conventional loan, you must pay a 20% down payment, but that is not the case. In fact, you can qualify for a conventional loan by putting down as low as a 5% down payment.
Conventional loans require a credit score of at least 620 but can allow for down payments as low as 3%. Beth Buczynski is a lead assigning editor on the international expansion team at NerdWallet.
Most mortgage lenders allow borrowers to pay off up to 20% of the loan balance each year. Instead, a mortgage prepayment penalty typically applies in situations such as refinancing, selling or otherwise paying off large amounts of a loan at a time.
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.
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.
A poor credit history indicates an increased risk of default. This scares off many lenders because there's a chance they may not get back what they lent you. Scores range from 300 to 850 with the two most popular credit-scoring models: The FICO® Score.
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