Conventional Loans

Conventional home loans are a popular type of mortgage that is not backed or insured by a government agency like the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA). Instead, conventional loans are funded and insured by private lenders, such as banks and mortgage companies.

Here's everything you need to know about conventional home loans:

1.    Loan Requirements: Conventional loans typically have stricter qualification criteria compared to government-backed loans. Lenders generally look for a good credit score, stable income, a low debt-to-income ratio, and a down payment of at least 3% to 20% of the home's purchase price.

2.    Loan Limits: Conventional loans have loan limits, which are the maximum loan amounts that can be borrowed without the need for a jumbo loan. These limits are set by the Federal Housing Finance Agency (FHFA) and can vary by location. In high-cost areas, the loan limits are higher than in standard areas.

3.    Private Mortgage Insurance (PMI): If you put down less than 20% of the purchase price, lenders typically require private mortgage insurance (PMI). PMI protects the lender in case of default and is an additional monthly cost for the borrower. Once you have built sufficient equity in the home, you may be able to cancel PMI.

4.    Down Payment Options: While a 20% down payment is often recommended to avoid PMI, conventional loans offer flexibility with down payments. Depending on the lender and your financial situation, you may be able to put down as little as 3%. However, keep in mind that a lower down payment may result in higher interest rates and the need for PMI.

5.    Fixed-Rate and Adjustable-Rate Mortgages: Conventional loans offer both fixed-rate and adjustable-rate mortgage (ARM) options. With a fixed-rate mortgage, the interest rate remains constant throughout the loan term, providing stability in monthly payments. ARMs have an initial fixed-rate period, after which the interest rate adjusts periodically based on market conditions.

6.    Loan Term Options: Conventional loans typically come with various term options, including 15-year and 30-year loans. A 15-year loan allows for faster equity buildup and results in lower overall interest payments, but the monthly payments are higher compared to a 30-year loan.

7.    Interest Rates: Conventional loans generally have competitive interest rates based on market conditions and your creditworthiness. Your credit score, loan-to-value ratio, and loan term can affect the interest rate you receive.

8.    Refinancing Options: Conventional loans can be refinanced to take advantage of lower interest rates, change loan terms, or access home equity. Refinancing may involve closing costs and qualification requirements, so it's important to evaluate the potential benefits and costs before proceeding.