When you’re in the market for a mortgage, you’re likely to come across the terms “conventional mortgage” or “conventional loan”. These widely available mortgages are offered by most lenders.

For borrowers with excellent credit and the ability to make a down payment of at least 3%, or even more, conventional loans often prove to be the most suitable choice. To determine if a conventional mortgage is right for you, it’s important to understand what this type of loan entails in the mortgage industry.

What exactly is a conventional mortgage?

A conventional loan is a type of mortgage that doesn’t have government backing, such as from the Department of Veterans Affairs. Conventional mortgages typically meet the down payment and income requirements established by Fannie Mae and Freddie Mac, and adhere to the loan limits set by the Federal Housing Finance Administration (FHFA).Comparing government loans and conventional mortgages

To qualify for a conventional loan, you generally need a credit score of at least 620. However, having a score above 740 will help you secure the best interest rate. Depending on your financial situation and the loan amount, you might be able to make a down payment as low as 3% with a conventional loan. It’s important to note that a higher down payment can potentially result in a lower interest rate.

Comparing government loans to conventional mortgages

Government-backed loans are insured by federal agencies, providing protection to lenders in case of borrower default. This insurance serves as an incentive for lenders to extend mortgages to a broader range of home buyers.

Conventional mortgages, on the other hand, are offered by many lenders who also provide government-backed loans. Lenders generally perceive conventional loans as riskier due to the absence of government guarantees, resulting in more stringent requirements for these types of mortgages.

Mortgages backed by government agencies offer distinct qualifications that can make them more appealing to certain home buyers.

• FHA loans, backed by the Federal Housing Administration, are designed to enhance affordability for low- to middle-income borrowers seeking to purchase homes. These loans offer relaxed lending standards, allowing for down payments as low as 3.5%, along with competitive interest rates. This combination of benefits empowers individuals to enter the housing market with greater ease and financial flexibility.
• VA loans, guaranteed by the U.S. Department of Veterans Affairs, are exclusively accessible to active service members and veterans. These loans offer the remarkable advantage of down payments as low as 0%, providing an exceptional opportunity for eligible individuals to achieve their homeownership dreams.
• USDA loans, supported by the U.S. Department of Agriculture, are specifically tailored for properties located in rural areas. Additionally, the USDA provides direct loans to low-income borrowers.

Conventional loans are not restricted to borrowers based on income, location, or military status. Eligibility for a conventional mortgage is open to anyone who can meet the lender’s criteria.

What are the different types of conventional loans that are available?

There are two main categories of conventional mortgages: “conforming” and “nonconforming” loans.

Conforming loans adhere to the guidelines established by Fannie Mae and Freddie Mac, two government-sponsored enterprises that support the U.S. housing market. One well-known rule pertains to the loan size. In 2022, the conforming loan limit for most single-family homes in the continental U.S. is $726,200. However, higher-cost areas like Hawaii and Alaska have higher limits, reaching up to $1,089,300 for single-family homes.

Many nonconforming loans are classified as jumbo loans, specifically designed for home buyers seeking to borrow amounts exceeding the conforming limit for their area. Additionally, nonconforming loans encompass various other categories, such as loans extended to borrowers with unfavorable credit, significant debt, recent bankruptcy, or for homes with a high loan-to-value ratio (typically up to 90% for conforming loans). Lenders generally impose higher interest rates on jumbo and other nonconforming loans, given their elevated risk profile. Furthermore, these loans may entail additional fees or insurance requirements due to their inherently more precarious nature.

Benefits of Conventional Loans

While qualifying for a conventional mortgage may present more challenges compared to government-backed loans, it remains a viable and attractive option for numerous home buyers.

• Expanded range of property types: Conventional loans offer versatility beyond jumbo loans for higher-priced homes. They can also be utilized for second homes or investment properties.
• Have more control when it comes to mortgage insurance: If your down payment on a conventional loan is below 20%, you will be required to obtain private mortgage insurance. However, once your principal loan balance decreases to 78% of the home’s value, you have the option to request the cancellation of your PMI. On the other hand, mortgage insurance premiums on FHA loans can remain in effect for the entire duration of the loan.
• No additional fees for the program: While you may still incur fees from the lender, conventional loans do not carry the extra program-specific expenses associated with government-backed loans. For instance, FHA loans require a 1.75% upfront mortgage insurance premium, and VA loans entail a funding fee ranging from 1.4% to 2.3%, based on your down payment.
• Wider range of loan structures: While 30-year fixed-rate conventional mortgages are widely prevalent, there are other alternatives available, such as 15- or 20-year loans, as well as adjustable-rate mortgages. Lenders have the flexibility to offer a variety of options as they are not bound by government-prescribed programs. This freedom allows them to create a wider range of choices for borrowers.

Contact Sword Mortgage To Learn More About Your Options

Call (770) 757-5750 or complete our online form to speak with a loan expert at Sword Mortgage to get help navigating your options and find a loan that fits your needs today.