Mortgage lenders can approve conventional loans without the typical delays incurred with FHA or government-backed loans. Also, with a conventional loan, sellers do not face an exhaustive FHA inspection, which sometimes then requires time-consuming repairs. Conventional loans come in all different types and sizes.
If you don't have a lot of cash for a down payment, a conforming loan might be a better choice. However, if you're able to make a larger down payment, a conventional loan may offer more flexibility. Other factors to think about are loan limits, debt-to-income ratios, and the type of property you want to buy.
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.
Conforming loans typically offer lower interest rates than other types of mortgages. Lenders prefer to issue conforming loans because they can be packaged and sold in the secondary mortgage market.
Non-conforming mortgages are best for those who need a larger loan or otherwise don't qualify for a conforming loan. This might include borrowers who have a lower credit score or limited or no down payment savings, or those who are real estate investors or self-employed.
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.
Benefits of a Conventional Loan
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.
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.
Drawbacks include stricter requirements to qualify, large payments if market rates increase, lack of 5% equity requirement, and additional fees if borrower has a less than excellent credit score.
Lower down payment requirement: For a fixed-rate conforming conventional loan, you're only required to put 3 percent down. This down payment can come from your savings, a gift, a down payment grant or other sources.
Mortgages purchased and guaranteed by Fannie Mae are called conforming loans. 14 Conforming loans often have lower interest rates than non-conforming or jumbo loans, not backed by Fannie Mae.
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.
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.
The type of mortgage being granted also plays a role. According to the ICE Mortgage data, conventional loans move slightly faster (43 days) than FHA loans (45 days), for example. Tack on the 20 days on market before that point, and the home sale would take around two months to complete, from listing to closing.
Conventional loans generally offer lower costs than other loan types, and if you meet credit score requirements and want a down payment of as low as 3%, a conventional mortgage might be the best solution for you. To find out what types of financing you qualify for, start the mortgage application process today.
While a 20% down payment is often recommended, it's not always required. A lender will look at the big picture when evaluating your mortgage application. Depending on your specific situation, you can put down as little as 3% when taking out a conventional mortgage.
Conventional conforming loans: 7.6% denial rate. Refinance loans: 24.7% denial rate.
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.
Conventional loans cons:
Lenders typically uphold stricter eligibility criteria and may require a higher minimum credit score than those offering government loans. While some conventional loans can be secured with as little as 3% down, some lenders may require you to make a down payment of at least 20%.
Department of Veterans' Affairs (VA)-backed loan
With VA-backed loans, which are loans intended to help servicemembers, veterans, and their families, there is no monthly mortgage insurance premium. However, you pay an upfront “funding fee.” The amount of that fee varies based on: Your type of military service.
A conforming loan is one that meets specific criteria set by the FHFA, including conforming loan limits. A conventional loan is any loan that isn't guaranteed or insured by the government (FHA, VA and USDA loans). Conventional loans can be either conforming or non-conforming.
Jumbo Loans. These loans are used to finance high mortgage amounts, often for luxury homes. A jumbo loan is a non-conforming loan, as it doesn't conform to the requirements of Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA).