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.
Why do many borrowers prefer conventional mortgages? Because they offer fixed monthy payments for the life of the loan, so homeowners can budget more easily.
Conventional is also a bit more flexible when it comes to the condition of the property, and from my experience, sellers prefer a conventional offer over an FHA offer. FHA will usually have a better interest rate and allows for a lower credit score. Which one is best depends on your situation. Good luck!
Key Takeaways. A conventional loan is a traditional mortgage offered by lending institutions such as banks and credit unions with fixed repayment terms and lower interest rates for those with good credit. The benefits include low interest payments, no down payment options, and adjustable rate mortgages.
Conventional loans generally have lower interest rates than FHA loans and can be easier to qualify for because they don't have minimum credit score requirements. Conventional mortgages tend to have fewer fees compared to FHA loans and offer more repayment options, such as biweekly payments or extended terms.
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.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
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.
Lower Interest Rates
While conventional loan interest rates are typically a bit higher than FHA rates, you could still get a lower interest rate and save money if current refinance rates are lower than when you first took out the loan. A lower interest rate could potentially save you thousands of dollars.
Conventional Loan
A conventional loan is a type of mortgage that isn't insured by the federal government. It's also the most popular kind of home loan. Two-thirds of people who purchased a home in 2023 did so with a conventional mortgage, according to the National Association of Realtors (NAR).
A fixed-rate mortgage offers a straightforward, predictable monthly payment. Your interest rate—and your total monthly payment of principal and interest—will stay the same for the entire term of the loan.
There is typically no legal limit to the number of people who can be on a mortgage. Most lenders prefer to work with a maximum of four borrowers on a single mortgage. Adding multiple borrowers can increase buying power but also complicates the loan process.
A lower credit score means more risk for your lender. Because of that, they'll charge you more to cover that risk, especially since a conventional loan doesn't have a government agency as a safety net. Once your score dips below 680, you could find that government-backed options offer more competitive rates.
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.
It's generally easier to qualify for an FHA loan compared to a conventional loan. Depending on the size of the down payment, a borrower needs a credit score of either 500 or 580 to get an FHA loan. Conforming conventional loans require a score of at least 620.
Conventional loans are ideal for borrowers with strong credit history, typically a credit score between 620 and 740, and a sum of money for about 20% of the down payment. Down payments that are less than 20% require private mortgage insurance (PMI). Your debt-to-income ratio (DTI) should be under 43%.
Investors Who Buy Loans
Some are commercial banks, some are private companies, some are real estate investment trusts, and some are other mortgage banks.
Cons of conventional loans
Can have higher interest rates: Conventional loans might have slightly higher interest rates than government-insured loans.
Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.
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.
There is also a perception by sellers that house-hunters utilizing conventional lending have better credit and are thus more reliable than other buyers, as conventional loans tend to require higher credit scores and larger down payments.
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.
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.