What is a Conventional Loan? (2019 Guide)
What does your dream home look like?
How many bedrooms does it have? What kind of flooring are you walking on? How do the windows look? Are those granite countertops or marble? Does the patio have enough space for you to lounge on a lazy Saturday afternoon?
Is that a kids playset in the backyard? Do you have a pool or a treehouse?
Now, take a step back, and what you probably didn’t imagine in that moment of bliss is the homebuying process: the loan application, the various loan types, the requirements and, lastly, how or where to begin.
And that’s OK! You are not alone.
A majority of prospective homeowners have questions about the buying process. What separates them is who they turn to for assistance.
So what do you do? Where do you start?
What you need is clarity.
What you need is Secure Choice Lending.
Call our office at (951) 707-9364 to solve your questions and assuage your concerns.
Still not convinced? This page explains the most popular home loan: conventional.
What is a conventional loan?
A conventional loan is a mortgage that is not guaranteed or insured by the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA) or any other government agency.
These loans are geared toward borrowers with higher credit scores and, at times, larger available funds for a down payment (typically 5-20%).
Conventional loans have products that provide borrowers more flexibility. Additionally, private mortgage insurance, or PMI, is removed at an LTV (loan-to-value) ratio of 80% or less.
It is likely you have heard of conventional loans before, either from your own research or a lender’s recommendation. This is because conventional loans are more commonly used than other government-guaranteed loans, such as FHA loans and VA loans.
In fact, according to the government census, conventional loans were used for 75% of all new home sales in the last quarter of 2018(1).
Simply put. it is the most widely used loan option.
What are the benefits of a Conventional Loan?
If you have a high credit score, and you have saved enough to make a down payment of up to 20%, a conventional loan is likely the right choice for you.
There are many benefits to conventional loans, for instance:
- Even if you have less than 20% to put toward a down payment, there is no upfront mortgage insurance fee. Government-backed loans require an upfront funding fee of about 1-3% of the total loan amount.
- If you can put 20% down, you are not required to get mortgage insurance.
- Interest rates are low.
- Fixed-rate mortgage loan options have term lengths ranging from 10 to 30 years.
- If you are not long for your new home, the adjustable-rate mortgage loan option is available. It has a lower interest rate than the fixed-rate loan option.
- Because conventional loans are not backed by the government, there are less restrictions than their government-backed peers. For example, conventional loans can be used to purchase a primary residence, a secondary home, a vacation property or a rental property. Government-backed loans can only be used to buy a primary residence.
What are the different types of conventional loans?
There are two types of conventional loans.
- Conforming Conventional Loan
Conforming conventional loans have terms and conditions that must meet the funding criteria of Fannie Mae and Freddie Mac.
Fannie Mae, or the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corporation, are government-sponsored entities that purchase mortgages from private lenders.
One key condition that Fannie Mae and Freddie Mac imposes is the loan limit. Conforming loans must not exceed the loan limit set every year by the Federal Housing Finance Agency, or FHFA.
According to the FHFA, the maximum conforming loan limit for 2019 for one-unit properties in most of the U.S. is $484,350. You can click here to see a map that shows the 2019 maximum loan limits across the U.S.
Call Secure Choice Lending at (951) 707-9364 to learn what the conforming loan limits are in your area.
- Non-conforming Conventional Loan
Conventional loans that exceed the set loan limit are considered non-conforming conventional loans. Also referred to as Jumbo Loans, non-conforming conventional loans are not purchased by Fannie Mae or Freddie Mac because they exceed the loan limit.
Non-conforming loans are funded by private institutions or lenders.
For questions about higher loan limits that exceed the amount set by FHFA, call Secure Choice Lending at (951) 707-9364.
Conventional Loan Rates
Conventional loans make home-buying affordable for many people because of their low interest rates.
Interest rates for these loans change daily, sometimes on an hourly basis, because they are based on mortgage-backed securities (MBS) and are traded just like stocks, which fluctuate throughout the day.
When financial news hits the market, these rates go up or down, depending on the news.
Borrowers who are already approved and already have a property selected can lock in the lowest rates when rates go down.
Your credit score is paramount when applying for a conventional loan.
A high credit scores means a low interest rate.
A low credit score means a high one.
It’s that simple.
Published rates usually are based on the ideal borrower — that is, one with a high credit score and funds available for a 20% down payment. That said, it is best to talk to a loan officer about interest rates.
Call Secure Choice Lending at (951) 707-9364 to get a quote based on your information, not an ideal borrower’s.
How do you qualify for a conventional loan?
You could be eligible for a conventional loan if you meet the following requirements:
- Ideally, you have a credit score of at least 620. Some lenders set a higher minimum credit score requirement. After all, they are taking a greater risk. If you have a lower credit score, you may want to apply for an FHA loan instead.
- You must be able to provide proof of income, including, but not limited to, recent pay stubs, W2s and tax returns.
- Your assets must reflect that you have sufficient available funds for the down payment and other closing costs.
Conventional Loan Options and Your Down Payment
While there are no down payment guidelines or standards that lenders must abide by, the size of your down payment will affect the interest rates on your loan, as well as the final loan costs.
Conventional loans typically require a higher down payment when compared to government-backed loans. Most lenders will ask you to put 5% down. However, you can put 10% or 20% down.
For large loan amounts, be prepared to provide an even higher down payment.
A large down payment will result in lower monthly mortgage costs. Moreover, a down payment of at least 20% on a conventional loan eliminates mortgage insurance, a perk that is not available for government-backed loans, which require borrowers pay mortgage insurance regardless of how much they put down.
Secure Choice Lending can Assist you with a Conventional Loan
There’s myriad information on conventional loans, and we know taking it all in at once can be pretty overwhelming.
But don’t panic!
Our loan officers are happy to answer all your questions and discuss your options.
Secure Choice Lending is a full-service mortgage broker that will secure you a mortgage that doesn’t break the bank.
To streamline the lending experience, our team of financial experts matches consumer needs with the appropriate loan programs and level of risk. With loan officers versed in all mortgage types, solutions to your home-buying questions are a phone call away.