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.
FHA loans generally accept modest credit scores: Borrowers with lower credit scores or credit challenges are frequently approved. Conventional loans generally favor higher credit scores: Borrowers tend to need moderate to high credit scores to receive opportune loan terms and rates.
Sellers are wary of FHA loans because they believe their property will have to pass a level of scrutiny that conventional loans don't. FHA indeed has minimum property requirements (MPRs) that don't apply to other loans.
Yes, there are some potential disadvantages for sellers to consider when choosing a conventional mortgage. First, the seller will have to meet more stringent requirements to qualify for a conventional loan than with an FHA loan, including higher credit scores and larger down payments.
Many sellers prefer conventional financing or any financing over FHA loans. Why? They feel that buyers who can secure any other financing option are 'stronger buyers. ' FHA buyers have a reputation for having low credit scores, little money to put down, and less than optimal qualifying requirements.
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.
It's often easier to qualify for an FHA loan than for a conventional loan because buyers can have a credit score as low as 580 and a debt-to-income (DTI) ratio of 50% or lower. However, applicants with a lower credit score and higher DTI ratio may still qualify for an FHA loan.
While conventional loans allow you to make a slightly smaller down payment of 3%, you must have a credit score of at least 620 to qualify. When you're deciding between a conventional loan versus an FHA loan, it's important to consider the cost of mortgage insurance.
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.
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.
The national conforming loan limit for 2024 for a one-unit property is $766,550. FHA's 2024 minimum national loan limit floor of $498,257 for a one-unit property is set at 65 percent of the national conforming loan limit.
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.
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.
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.
While some sellers may be hesitant to accept an FHA offer, it's important to understand the facts before making a decision. 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.
The Advantages of a Conventional Mortgage
Homeowners with good credit and money for a larger down payment could avoid paying upfront mortgage insurance or monthly mortgage insurance like an FHA loan.
Which loan is better: FHA or conventional? To a large extent, that depends on you and your financial profile. Generally, a conventional loan is best for those with strong credit and a bigger home buying budget. If your credit score is below 620, a loan backed by the FHA might be your only option.
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 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.
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.
If a home is too close to a high-pressure gas pipeline, high voltage electrical wires, mining or drilling operations or other hazards, it may not be possible for your lender to approve the loan.
The closing costs in your FHA loan will be similar to those of a conventional mortgage loan. These costs typically will be around 2% to 6% of the cost of your property. Your costs will be tied to things like your loan amount state the property is located in and lender fees.
All FHA loans used for a home purchase require an independent property appraisal. The appraised value must be at least the same as the sales price. If the appraisal comes in lower, the borrowers must either come up with more money to make up the difference or have the home seller reduce the sales price of the home.