Conventional Loans for Home Buying
A Common Mortgage Solution
A conventional loan is a mortgage that is not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the USDA Rural Housing Service. Instead, these loans are offered by private lenders and typically conform to the standards set by Fannie Mae and Freddie Mac, which include loan limits and credit requirements.
Benefits of Conventional Loans
Flexible Terms and Conditions:
Conventional loans offer a variety of terms, including fixed-rate and adjustable-rate mortgages, allowing borrowers to choose the option that best fits their financial situation and goals.
Lower Overall Costs:
Conventional loans can have lower overall costs compared to government-backed loans. If you have a higher credit score and a substantial down payment, you may qualify for lower interest rates and no mortgage insurance.
No Mortgage Insurance with 20% Down:
If you make a down payment of at least 20%, you are not required to pay private mortgage insurance (PMI), which can save you money over the life of the loan.
Higher Loan Limits:
Conventional loans often have higher loan limits than government-backed loans, making them suitable for purchasing more expensive properties.
Wide Range of Property Types:
Conventional loans can be used to purchase a variety of property types, including single-family homes, condos, multi-family homes, and investment properties.
Option to Cancel PMI:
With conventional loans, you can request to cancel PMI once you have 20% equity in your home, and it will automatically terminate once you reach 22% equity.
Frequently Asked Questions About Buying a Home
What is the minimum credit score required for a conventional loan?
The minimum credit score for a conventional loan is typically 620, but a higher score can help you qualify for better interest rates and terms.
How much down payment is required for a conventional loan?
Conventional loans typically require a down payment of at least 5%, though putting down 20% or more can help you avoid private mortgage insurance (PMI).
Can I use a conventional loan to buy an investment property?
Yes, conventional loans can be used to purchase investment properties, including rental properties and vacation homes.
What are the loan limits for conventional loans?
Conventional loan limits vary by location but generally conform to the limits set by Fannie Mae and Freddie Mac. As of 2024, the limit for a single-family home in most areas is $726,200, with higher limits in high-cost areas.
Are there any income limits for conventional loans?
No, there are no income limits for conventional loans. They are available to any qualified borrower who meets the credit and down payment requirements.
What is private mortgage insurance (PMI), and when is it required?
PMI is insurance that protects the lender if the borrower defaults on the loan. It is required for conventional loans with a down payment of less than 20%. PMI can be canceled once you reach 20% equity in your home.
Can I refinance a conventional loan?
Yes, you can refinance a conventional loan to take advantage of lower interest rates, change your loan term, or access your home’s equity through a cash-out refinance.
What are the advantages of a fixed-rate conventional loan?
A fixed-rate conventional loan has a consistent interest rate and monthly payment for the life of the loan, providing stability and predictability for budgeting.
What are the advantages of an adjustable-rate conventional loan (ARM)?
An ARM typically offers a lower initial interest rate than a fixed-rate loan, which can result in lower initial monthly payments. However, the rate and payment can adjust periodically based on market conditions.
What are the debt-to-income (DTI) ratio requirements for conventional loans?
Most lenders prefer a DTI ratio of 43% or lower for conventional loans, though some may allow higher ratios with compensating factors such as a higher credit score or larger down payment.