A Conventional Loan is a type of mortgage that is not backed by the U.S. federal government and is available through private lenders.
Conventional Loans are the most popular type of mortgage loan. They come in a range of terms including the common 15-year and 30-year terms. Since conventional mortgage loans are not insured by the government like FHA or VA Loans, they have stricter credit standards. Some Conventional Loans have the option for down payments as low as 3% of the purchase price, but if you put down less than 20% you will have to add Private Mortgage Insurance (PMI) to your payment for a period of time.
Anyone can apply for Conventional Loans — whether you’re moving up to a larger home, downsizing, buying a vacation home, or buying for the first time. However, all applicants must meet certain loan requirements, including:
Conventional mortgages generally require higher credit scores (typically at least 620) and lower DTI ratios than government-backed mortgages such as FHA Loans. There are several ways to raise your credit score before applying for a mortgage.
Many people believe that you need a 20% down payment for a Conventional Loan, and while a 20% down payment means you won’t have to pay mortgage insurance, there are also low down payment options. Qualified buyers can put as little as 5% down on their Conventional Loan payments and, in some cases, even 3%.
Your DTI is one way lenders assess how you manage your finances. The highest allowable DTI ratio for a government-backed loan is 50% but it’s typically in the 43% - 45% range for Conventional Loans. Your DTI is your total recurring monthly debts (student loans, credit card payments, etc.), divided by your monthly pre-tax income, expressed as a percentage. For example, if your rent is $1,000 per month, your car payment is $500 per month, and your monthly credit card payment is $800, your total monthly debt is $2,300. If your gross income is $6,000 per month, then your DTI is roughly 38% (2,300 ÷ 6,000 = 38.3).
When you finance your home with a conventional mortgage and pay less than 20% toward the down payment, you will be required to pay PMI for a period of time. Unlike some government loans that require mortgage insurance for the life of your loan, PMI is cancellable once you reach 20% equity.
One of the many perks to Conventional Loans is that they can be used to finance any type of property – primary residences, second-homes, rental properties, or even investment properties. With most other loans, the property which you are financing must be your primary residence.
Applying for a Conventional Loan is easy. To get started, you will want to gather the following:
If you have any questions, do not hesitate to call or text us at 480-452-5282
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