Conventional mortgages are often the best choice for borrowers who have excellent credit and a down payment of at least 20 percent. These loans can be used to buy a primary home, second home or investment property, unlike FHA or VA loans, which may only be used for a primary home.
The requirements for a conventional loan include: Credit score: 620. Debt-to-income (DTI) ratio: 45 percent (with exceptions up to 50 percent) Down payment: 3 percent for a fixed-rate loan; 5 percent for an adjustable-rate loan.
Investors include Fannie Mae and Freddie Mac, both of which purchase conventional loans, and Ginnie Mae, which purchases Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) 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.
These loans are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance while also giving borrowers the option of fixed or adjustable rates.
Conventional mortgage loans may be “one-of-the-many” loan options for real estate investors but not the most suitable one. The reason being: conventional loans take a long time to process and generally require the borrower to have a great credit score.
Debt-to-income ratio
Many lenders want this ratio to be less or equal to 36% of the borrower's income. However, conventional loans may allow a DTI as high as 49%. To find your debt-to-income ratio, add up your loan payments, including: Student loans.
Financial Qualifications
Generally speaking, anyone who is considering assuming a conventional loan should be prepared to show proof of their income and have solid credit. Additionally, additional fees may also be required in order for the assumption process to move forward.
The main disadvantage of a conventional loan is the requirement for a down payment, which can be quite large depending on the loan amount and the borrower's financial situation. Additionally, borrowers need to show that they have assets that can be used to pay off the loan as well as reserves in case of a hardship.
Examples of conventional loans include fixed-rate mortgages, adjustable rate mortgages (ARMs), jumbo loans, and conforming loans. Fixed-rate mortgages are one of the most common types of conventional loans, and they offer a set mortgage rate that remains fixed over the course of the loan's life cycle.
The 2025 conforming limit for most counties in California State is $806,500, with several exceptions in higher-priced areas.
Answer: You can get a conventional mortgage loan from banks, credit unions, and mortgage companies if you meet their lending criteria. In as little as 3 minutes, you can see the conventional loan rates you qualify for with a Better Mortgage pre-approval.
While conventional loans may be most commonly associated with primary residences, they're also widely used for investment properties. Investors appreciate that conventional financing often provides predictable monthly payments, and the qualification standards can be more streamlined than some alternative options.
Overall, FHA Loans can be a good option for borrowers who may not qualify for a Conventional Loan. However, they may have higher costs in the form of mortgage insurance and slightly higher interest rates. Conventional Loans may have stricter eligibility requirements, but they may also have lower costs in the long run.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
Conventional loans are often the best option for borrowers with strong credit who can contribute a down payment of at least 3%, or perhaps quite a bit more. Find out what conventional means in the mortgage industry, and whether it might be the right type of home loan for you.
Homebuyers often like Conventional loans because of their flexible down payment options, which can be as low as 3%, easier inspection requirements, and the opportunity to get rid of mortgage insurance.
Typically, to qualify for a conventional loan, you'll need a credit score of at least 620. Some lenders require a credit score of at least 660. However, if you want to make a lower down payment and get the best interest rates, it's best to have a score of 740 or higher.
Conventional Loan: Cons
Higher credit-score threshold and lower debt-to-income ratio to meet than with FHA loan. PMI insurance with < 20% down payment. Meeting strict eligibility requirements overall.
Reasons your mortgage application may be denied include a dip in your credit score, increased debt, paperwork errors, a low home appraisal and unverified cash deposits.
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.