A conventional loan is one that is provided by a private lender such as a bank or credit union. With a conventional loan, you get the money you need upfront and pay back the lender over the course of your mortgage. Conventional home loans typically require a down payment and good finances to secure the best terms. A conventional, or conforming, mortgage adheres to the guidelines set by Fannie Mae and Freddie Mac. It may have either a fixed or adjustable rate.
Is a conventional loan good?
A conventional loan is a great option if you have a solid credit score and little debt. You can avoid PMI by paying 20% of the loan upfront, which will lower your mortgage payments. If you’re unable to make a large payment upfront, conventional loans are available with a down payment as low as 3%
What is the downside of a conventional loan?
Tougher credit score requirements than for government loan programs. Conventional loans often require a credit score of at least 620, which leaves out some homebuyers. Even if you qualify, you will likely pay a higher interest rate than if you had good credit.
Why do realtors prefer conventional loans?
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
Typical conventional loan requirements include:
- Minimum credit score of 620.
- Minimum down payment of 3-5%
- Debt-to-income ratio below 43%
- Loan amount within local conforming loan limits.
- Proof of stable employment and income.
- Clean credit history (no recent bankruptcy or foreclosure)