Conventional Loans

Conventional Home Loans

A conventional loan is a type of loan that doesn’t have government backing or insurance, unlike FHA, VA, and USDA loans. Offering flexibility, competitive rates, and higher loan limits for qualified borrowers.

What is a Conventional Loan

Flexible Financing Without Government Backing

A conventional loan is a type of loan that doesn’t have government backing or insurance, unlike FHA, VA, and USDA loans, which are insured by the government. Conventional mortgage loans, whether conforming or non-conforming, usually require a slightly larger down payment than some government loans.

However, conventional loans offer more flexibility and fewer restrictions for borrowers, especially those with good credit and steady income. They often have more flexible terms and lower interest rates than government-backed loans.

Conventional loans also allow for higher loan amounts, making them suitable for financing higher-priced homes. Whether you’re a first-time buyer or a seasoned homeowner, a conventional loan could be the right choice for your situation.

Conventional Loans Flexibility & Choice

No government backing means more flexibility in loan terms, property types, and eligibility.

” Conventional loans offer competitive rates, flexible terms, and the ability to finance various property types.

Why Conventional

Advantages of a Conventional Loan

Conventional loans offer several advantages that make them an excellent choice for many homebuyers.

Higher Loan Limits

Conventional loans generally offer higher loan limits compared to FHA loans. Beneficial for financing more expensive properties or living in high-cost areas.

No Upfront Mortgage Insurance

Unlike FHA loans, Conventional loans do not require upfront mortgage insurance premiums. Save on upfront costs and lower your overall loan amount.

Flexible Mortgage Insurance Options

Once you reach 80% LTV, you can cancel PMI or request its removal, significant savings over time compared to FHA loans.

More Lenient Property Standards

Conventional loans have more flexibility when it comes to property condition and appraisal requirements. FHA loans often have stricter standards.

Competitive Interest Rates

Borrowers with good credit and steady income often qualify for lower interest rates than government-backed loans.

Flexible Terms

Conventional loans offer more flexibility in loan terms, including fixed-rate and adjustable-rate options to fit your needs.

Qualification

Do You Qualify for a Conventional Loan?

To qualify for a conventional loan, you generally need a good credit score, stable employment history, and a manageable debt-to-income ratio.

Credit Score

Generally need a credit score above 620. Higher scores may qualify for better rates and terms.

620+ minimum

Employment History

Stable employment history with consistent income. Typically 2+ years of steady employment.

2+ years steady employment

Debt-to-Income Ratio

Manageable DTI ratio. Most lenders prefer a DTI of 43% or lower, though some allow up to 50%.

43% – 50% DTI

Other factors, such as your income, assets, and the property’s appraisal value, will also be considered. Specific requirements may vary, so it’s essential to consult with a mortgage professional to determine your eligibility.

Down Payment

Low Down Payment Options

It is possible to obtain a conventional mortgage loan with a down payment as low as 3%.

Minimum Down Payment

Some borrowers may qualify to purchase a home with a 3% down payment.

3–5%

Typical Range

While conventional loans traditionally require a larger down payment, some borrowers may qualify with 3-5% down.

20%

No PMI Required

A 20% down payment eliminates the need for private mortgage insurance (PMI).

Keep in mind that a lower down payment may result in additional costs, such as private mortgage insurance (PMI).

Conventional vs FHA

Conventional vs FHA Comparison

Both loan types have their own advantages. The right choice depends on your specific financial situation and goals.

Conventional Loan

3% minimum down payment
No upfront mortgage insurance
Cancel PMI at 80% LTV
Higher loan limits
More lenient property standards
620+ credit score typically required
No government backing

FHA Loan

3.5% minimum down payment
Upfront mortgage insurance required
PMI for life of loan
Lower loan limits
Stricter property standards
580+ credit score (3.5% down)
Government-insured

Consulting with a mortgage professional can help you evaluate the options and determine the best fit for your needs.

Refinancing

Refinancing from FHA to Conventional

The timing for refinancing an FHA loan into a conventional loan depends on several factors.

In most cases, you can refinance an FHA loan into a conventional loan once you have built enough equity in your home. Typically, this means reaching an 80% loan-to-value (LTV) ratio.

However, specific requirements may vary, so it’s important to discuss your options with a mortgage professional who can guide you through the process.

Pro Tip: Refinancing from FHA to Conventional can eliminate monthly mortgage insurance premiums, saving you money over time.

Closing Costs

Options to Cover Closing Costs

There are several options available to help cover closing costs with your conventional loan.

Seller Concessions

Ask the seller for "seller concessions" to help pay your closing costs. Negotiate this into your contract when buying the home. Feasibility may vary depending on market conditions.

Buy Up Your Rate

Consider paying a higher mortgage interest rate in exchange for the lender's assistance covering your closing costs. This is commonly known as "buying up" your interest rate.

Gift Money

Some conventional home loan programs allow gift money from family members, employers, or close friends to help with closing costs. Let your mortgage professional know if you plan to use gift money.

Down Payment Assistance Programs

Explore grants and forgivable loans through down-payment assistance programs. Typically managed at the county or state level, eligibility requirements vary. Consult your mortgage professional for availability.

Private Mortgage Insurance

Understanding PMI

Private Mortgage Insurance (PMI) is a key consideration for conventional loans with lower down payments.

Key Advantage: With a Conventional loan, once you reach a loan-to-value (LTV) ratio of 80% or less, you have the option to cancel PMI or request its removal. This can result in significant savings over time compared to FHA loans, which typically require mortgage insurance for the entire loan term.

Tip: Work with your lender to understand your PMI options and the timeline for cancellation.

Tax Considerations

Can You Get a Conventional Loan If You Owe Taxes?

It is possible to obtain a conventional loan if you owe taxes, but it depends on several factors.

First, it’s important to understand the difference between owing taxes and having a tax lien. Owing taxes means you owe money to the IRS and/or a state, while a tax lien occurs when your unpaid taxes result in collection actions.

Important: Having an IRS lien on your income or assets can significantly decrease your chances of being approved for a conventional mortgage.

Communicate openly with your mortgage professional to guide you through the loan application process and help you explore potential solutions or alternatives.

Got Questions?

Conventional Loan FAQs

Common questions about conventional loans, eligibility, and the application process.

What is the minimum down payment for a conventional loan?

It is possible to obtain a conventional mortgage loan with a down payment as low as 3%. While conventional loans traditionally require a larger down payment, some borrowers may qualify with 3-5% down.

What credit score do I need for a conventional loan?

You generally need a credit score above 620 to qualify for a conventional loan. Higher scores may qualify for better rates and terms.

Can I cancel PMI on a conventional loan?

Yes. With a Conventional loan, once you reach a loan-to-value (LTV) ratio of 80% or less, you have the option to cancel PMI or request its removal. This is a significant advantage over FHA loans.

What are the DTI requirements for a conventional loan?

Most lenders prefer a debt-to-income ratio (DTI) of 43% or lower, though some may allow up to 50% with strong compensating factors like excellent credit or significant reserves.

Can I refinance an FHA loan into a conventional loan?

Yes. In most cases, you can refinance an FHA loan into a conventional loan once you have built enough equity in your home, typically reaching an 80% loan-to-value (LTV) ratio.

What options are available to cover closing costs?

Options include seller concessions, buying up your interest rate, gift money from family or friends, and down-payment assistance programs managed at the county or state level.

Can I get a conventional loan if I owe taxes?

It is possible but depends on several factors. Owing taxes is different from having a tax lien. An IRS lien on your income or assets can significantly decrease your chances of approval. Communicate openly with your mortgage professional.

What property types can I finance with a conventional loan?

Conventional loans offer more flexibility when it comes to property condition and appraisal requirements. You can finance primary residences, second homes, and investment properties.

Ready to Explore Conventional Loan Options?

Our mortgage professionals are here to help you evaluate your options and find the best loan for your needs. Get started today.

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