Conventional mortgage loans usually require a credit score of 620 or higher and a stable income for qualification.
Conventional mortgages make buying properties and getting out of monthly rent payments easier. While these financial products offer plenty of leverage, choosing the right mortgage for your financial situation is important. This guide will explore some of the common types of conventional mortgages. You’ll also discover how to qualify for these loans and review some of the top lenders in the industry.
Key Takeaways
- Conventional mortgages make it easier to buy properties.
- The type of mortgage you select determines your interest rate and monthly payments.
- A high credit score, low debt-to-income ratio, and a down payment will increase your chances of getting approved.
What is a Conventional Mortgage Loan?
Conventional mortgage loans are home financing options not backed by the federal government and follow guidelines from Fannie Mae or Freddie Mac. They can be fixed or adjustable-rate and usually require a down payment of 3% to 20%. Borrowers with good credit tend to receive better terms, while those with lower credit scores may face higher rates and stricter requirements.
Understanding How Conventional Loans Work
Conventional loans make the cost of buying a home more manageable. Instead of paying upfront for the entire purchase, you can make monthly mortgage payments with terms as long as 30 years. Borrowers can choose from many conventional mortgage lenders and compare offers to ensure they get the best rates and terms.
These loans use your property as collateral. If you fall behind on mortgage payments, your property could go into foreclosure. However, making on-time monthly mortgage payments will get you closer to owning your home debt-free.
Types of Conventional Loans
Homebuyers can choose from several types of mortgages. These are some of the most popular options:
Conforming Loans
Conforming loans follow the rules set by Fannie Mae and Freddie Mac. They cannot exceed 30 years and have additional requirements, such as the maximum loan amount. The Federal Housing Finance Agency sets loan limits for conforming loans.
Nonconforming Loans
Nonconforming loans are any mortgages that do not conform to the rules established by Fannie Mae and Freddie Mac. These loans may have terms longer than 30 years, high loan amounts that can comfortably exceed $1 million, and different eligibility criteria.
Many types of mortgages fall under the nonconforming umbrella. Certain government-backed programs, such as FHA, VA, and USDA loans, offer nonconforming loans. These loans have different minimum requirements than Fannie Mae and Freddie Mac loans.
Some nonconforming mortgages have unique requirements and payment structures. Hard money loans, bridge loans, and asset-based mortgages are common types of nonconforming mortgages.
Adjustable-Rate Loans
Adjustable-rate mortgages have variable interest rates that fluctuate as market conditions change. Most of these loans start with lower interest rates that can increase over time. Borrowers will likely end up paying more attention to the Federal Reserve's decisions about interest rates. Any interest rate hikes will increase monthly payments, while rate cuts will reduce monthly payments.
Borrowers trade the stability of fixed monthly payments for lower initial payments and the potential for even lower payments if interest rates go down.
Fixed-Rate Loans
Fixed-rate loans have the same monthly payment for the duration of the loan, so you won’t have to worry about interest rate fluctuations impacting your monthly payments. However, borrowers will have to refinance their fixed-rate loans to secure lower interest rates in the future. These loans are great if the Federal Reserve continues raising interest rates.
Jumbo Loans
Jumbo loans are financial products for homebuyers who want luxury homes. While Fannie Mae and Freddie Mac have conforming loan limits, borrowers who need to finance over $1 million for their home purchase will likely need a jumbo loan.
These loans have more stringent requirements. You may need a 700 FICO score just to qualify, and you can also expect a higher interest rate and a higher down payment requirement.
Portfolio Loans
Portfolio loans are nonconforming loans that stay on a portfolio lender’s books. Since it is nonconforming, these lenders won’t sell your mortgage to secondary markets. Portfolio lenders have more flexible requirements, which can make loans more accessible. However, you may also have to contend with higher interest rates and fees.
Subprime Loans
Subprime mortgages are given to people who have lower credit scores. These loans make homeownership more accessible but usually come with higher rates. Getting one of these loans is possible if you have a credit score below 660 or a debt-to-income ratio of 50% or more.
How to Qualify for a Conventional Loan
Lenders consider a few factors when assessing whether you qualify for a conventional mortgage. These are the highlights.
- Credit score: You typically need a 620 FICO score or higher to qualify for a conventional mortgage. A higher credit score will result in a lower rate.
- DTI ratio: The max DTI ratio is 50%, but some lenders only work with borrowers who have DTI ratios below 43%. This ratio measures your monthly debt obligations as a percentage of your monthly income.
- Down payment: You must put at least 3% down for a conventional mortgage, but a higher down payment will improve your chances of getting approved.
Compare the Best Conventional Mortgage Loans From Benzinga’s Top Providers
You can choose from many conventional mortgage loans. These are some of the best options available.
Financing Your Home
Mortgages make homeownership more accessible for many people. You can choose from many options, but it’s a good idea to assess all of them before committing to a mortgage. Comparing financial products can help you get better rates and terms for your mortgage.
Frequently Asked Questions
What are the main differences between conventional and government-backed loans?
Conventional mortgages tend to have higher FICO scores and DTI requirements than government-backed loans. Some government-backed loans don’t require down payments.
What are the advantages and disadvantages of conventional loans?
Conventional loans have higher barriers to entry but offer competitive rates and terms. Conventional loans also have restrictions, such as how much money you can borrow.
What type of mortgage insurance is used with conventional loans?
Mortgage insurance only applies if you have less than 20% equity in your property. If you use a conventional loan and don’t have enough equity, you will have to make private mortgage insurance payments.
About Marc Guberti
Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.