If you’re in the market for a new home or looking to refinance your current mortgage, you’ve likely heard the term “conventional loan” thrown around. But what exactly does it mean, and how does it differ from other types of loans? In this post, we’ll explore what conventional loans are, the different types of conventional loans, and some examples of when you might consider this type of financing.
What's a Conventional Loan?
A conventional loan is a type of mortgage that is not guaranteed or insured by the government, unlike loans backed by the Federal Housing Administration (FHA), Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA). This means that the lender assumes more risk, so borrowers typically need to have a higher credit score, lower debt-to-income ratio, and a larger down payment than they would with a government-backed loan. Conventional loans also typically have stricter underwriting requirements and higher interest rates than government-backed loans.
Types of Conventional Loans
There are two main types of conventional loans: conforming and non-conforming.
Conforming loans meet the guidelines set forth by Fannie Mae and Freddie Mac, which are government-sponsored entities that purchase mortgages from lenders. These loans have limits on the amount you can borrow, which vary by county and can change each year. In 2023, the conforming loan limit for most areas of the U.S. is $647,200, although it can be higher in high-cost areas.
Non-conforming loans, also known as jumbo loans, exceed the conforming loan limit. These loans are riskier for lenders because they involve larger amounts of money and often have fewer underwriting requirements than conforming loans.
Examples of When to Consider a Conventional Loan
You have a high credit score and a sizable down payment: If you have a credit score of at least 620 and can put down at least 5% of the purchase price, you may be a good candidate for a conventional loan. You may be able to secure a lower interest rate and avoid paying private mortgage insurance (PMI) if you put down 20% or more.
You’re refinancing your mortgage: If you have equity in your home and want to refinance your mortgage, a conventional loan may be a good option. You can use the equity in your home to qualify for a lower interest rate, cash out some of your equity for home improvements or other expenses, or switch from an adjustable-rate to a fixed-rate mortgage.
You’re buying an investment property: If you’re looking to buy a rental property or other investment property, a conventional loan may be your only option. Government-backed loans are only available for primary residences.
To summarize, conventional loans are a suitable choice for borrowers with robust credit, a substantial down payment, and a favorable debt-to-income ratio. These loans are available in two types, conforming and non-conforming, and can be utilized for different purposes, such as buying a primary residence, refinancing, or acquiring an investment property. To ensure you get the most favorable terms and rates, it’s crucial to explore different lenders and compare their offerings. However, you don’t have to do it alone! Schedule an appointment with us today to get the process started!
