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 conventional loan is a great option if you have a solid credit score and little debt. You can avoid PMI by paying 20% of the loan upfront, which will lower your mortgage payments. If you're unable to make a large payment upfront, conventional loans are available with a down payment as low as 3%.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. 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.
A conventional loan is one that is provided by a private lender such as a bank or credit union. With a conventional loan, you get the money you need up front, and pay back the lender over the course of your mortgage. Conventional home loans typically require a down payment and good finances to secure the best terms.
Mortgage loans offered by private sources are called "conventional loans" or "non-GSE loans" and come in many forms. Loans offered by the Fair Housing Administration (FHA) or secured by the Veterans Association (VA) are two examples of government loans.
Cons: Why a conventional mortgage may not be right for you
The eligibility requirements for conventional loans are more stringent than government-backed loans. Conforming loans are sold to Fannie Mae or Freddie Mac soon after being created to help keep mortgages affordable for homebuyers.
The minimum down payment required for a conventional mortgage is 3%, but borrowers with lower credit scores or higher debt-to-income ratios may be required to put down more. You'll also likely need a larger down payment for a jumbo loan or a loan for a second home or investment property.
Conventional Loans. FHA loans allow lower credit scores than conventional mortgages do, and are easier to qualify for. Conventional loans allow slightly lower down payments. Many or all of the products featured here are from our partners who compensate us.
Quick Answer. A conventional loan is a mortgage loan that's not backed by a government agency. These loans come in all shapes and sizes, and while they don't provide some of the benefits as FHA, VA and USDA loans, conventional loans remain the most common type of mortgage loan.
A "conventional" (conforming) mortgage is a loan that conforms to established guidelines for the size of the loan and your financial situation. Conventional loans may feature lower interest rates than jumbo loans, FHA loans or VA loans. Terms of these conventional loans typically range from 10 to 30 years.
Sellers' Own Perceptions
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
The Conventional 97 Loan is a 3% down payment option for any borrower. You don't have to be a low-income home buyer either, as is necessary for HomeReady and Home Possible loans, two other low down payment options Fannie Mae and Freddie Mac offer.
FHA loans tend to have higher closing costs than conventional loans, but because FHA loans allow the seller to pay for more of your closing costs than conventional loans, they may actually be cheaper.
One of the main requirements for a conventional loan is that the home must be appraised. The appraiser's job is to work out the property's actual market value. Usually, they do this by comparing the property with other, similar homes in the neighborhood that have sold recently.
An FHA loan has lower down payment requirements and is easier to qualify for than a conventional loan. FHA loans are excellent for first-time homebuyers because, in addition to lower up-front loan costs and less stringent credit requirements, you can make a down payment as low as 3.5%.
The mortgage approval process can take anywhere from 30 days to several months, depending on the status of the market and your personal circumstances.
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.
Conventional mortgages typically have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. Conventional mortgages or loans are not guaranteed by the federal government and as a result, typically have stricter lending requirements by banks and creditors.
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.
Yes. The Conventional 97 program allows 3 percent down and is offered by most lenders. Fannie Mae's HomeReady and Freddie Mac's Home Possible programs also allow 3 percent down with extra flexibility for income and credit qualification. FHA loans come in a close second, with a 3.5 percent minimum down payment.
Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
Options for putting down less than 20 percent
Here are some common options: A conventional loan with private mortgage insurance (PMI). “Conventional” just means that the loan is not part of a specific government program. Typically, conventional loans require PMI when you put down less than 20 percent.
Borrowers who take out FHA loans will likely face higher costs upfront and with every payment, and it could signal that they aren't ready for a mortgage. You'll also have to pay mortgage insurance, and FHA loans are less flexible than conventional loans.