Someone would choose a conventional loan to avoid PMI (Private Mortgage Insurance) after reaching 20% equity, secure lower interest rates with a high credit score, and enjoy faster closing times. Conventional loans offer flexibility for investment properties, second homes, and higher, more flexible loan limits compared to stricter government-backed loans.
You choose a conventional loan for its flexibility, competitive rates, and potential to eliminate mortgage insurance with 20% down, making it a popular choice for borrowers with good credit who want options for primary, second, or investment homes, and shorter loan terms, but it generally requires higher credit scores and down payments than government loans.
“Conventional” just means that the loan is not part of a specific government program. Conventional loans typically cost less than FHA loans but can be more difficult to get.
Neither loan is universally "better"—it depends on your financial situation, but conventional loans are often better for those with good credit needing flexibility (investment properties, canceling insurance), while FHA loans are better for borrowers with lower credit scores or small down payments, as they offer easier qualification but come with stricter rules and perpetual mortgage insurance. Conventional loans can be cheaper long-term if you avoid mortgage insurance by putting 20% down; FHA loans have easier entry but ongoing costs (MIP).
“When sellers put their home up for sale, they want to ensure that the deal will close quickly and without any unnecessary stress. With a conventional mortgage loan, the process is often more predictable.
Cracks in the foundation, signs of water damage, or evidence of settling can raise red flags. These issues often require a structural engineer's inspection, which can add time and cost.
The FHA 85% rule refers to a past guideline for cash-out refinances limiting the loan to 85% Loan-to-Value (LTV) and a specific rule for identity-of-interest transactions (like buying from family) where borrowers couldn't finance more than 85% of the home's value unless exceptions applied, such as renting from the family member for at least six months prior. While the general cash-out LTV is now 80%, the 85% rule still applies to certain related-party sales, requiring a 15% down payment unless an exception is met, notes FHA.com.
No, conventional loans don't strictly require a 20% down payment; many programs allow as little as 3-5% down, but putting less than 20% down means you'll pay Private Mortgage Insurance (PMI) until you build sufficient equity, whereas 20% down avoids PMI and can secure better terms. Lenders often look for a 620 credit score and may require more down payment if your credit is weaker.
Conventional loans like this may also have lower interest rates than jumbo loans, FHA loans or VA loans. The conventional fixed-rate mortgage allows for a flexible down payment (as little as 3%), and the term of the loan typically ranges from 10 to 30 years.
If your credit score is 620 or higher, you'll have a chance to get approved for a conforming conventional loan. And if it's in the mid- to upper-700s, you'll have a better chance of qualifying for favorable terms on your new loan. Save for a down payment.
Conventional loans can be helpful in several different situations including, first-time homebuyers, buyers who want to refinance, those who want to buy a second property (which is not allowed with government-backed loans), buyers with higher credit scores, or those who can put more money down.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
FHA loan disqualifications often stem from a poor credit history (especially recent bankruptcies/foreclosures or delinquent federal debt), a high debt-to-income (DTI) ratio (over 43-50%), or insufficient funds for down payment/closing costs, plus issues like having an existing FHA loan without proper justification or the property not meeting FHA standards. Resolving delinquent federal debts (student loans, taxes) is crucial, and a score below 500 generally disqualifies you, though most lenders prefer 580+.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.
Here's a list of seven symptoms that call for attention.
A house won't qualify for conventional financing primarily due to health and safety issues, structural problems, or significant deferred maintenance found during appraisal, like a bad roof, faulty electrical/plumbing, or foundation damage, as lenders need assurance the home is safe and retains its value. Other reasons include non-standard construction, being a unique property (hard to appraise/resell), or issues like underground tanks, environmental hazards, or major outbuildings needing repair, making it a poor investment risk.
Mortgage insurance usually lasts the whole term of an FHA loan, but opting to refinance with a conventional loan can eliminate mortgage insurance altogether, or significantly reduce the premiums you pay. Another way to obtain more favorable terms is in the interest rate.
Conventional loans have a minimum down payment of 3%, although you may need 5, 10, or even 20% to qualify for a conventional loan if you have any issues on your credit report. For homebuyers with good credit, conventional loans are a versatile option that can be used for a range of property types.