Conventional loans are mortgages that aren’t backed by the federal government. Unlike FHA, VA and USDA loans, they are not insured by a government agency. Although, if they are conforming conventional loans, they can be bought by government-sponsored enterprises such as Fannie-Mae and Freddie-Mac.
With a conventional mortgage, the lending requirements can be stricter then some of the government backed counter parts. Along with typically needing a higher credit score, the borrower will also need a lower debt-to-income.
Why use a Conventional Loan?
Going through the lending process, a conventional loan can be more attractive since they aren’t as stringent on the property being purchased. With government insured loans, the property must go through a more rigorous appraisal process. That is especially important to keep in mind if buying an older property.
When making an offer on a home, the seller will typically like your offer better if you are using a conventional mortgage. This is due to the hoops that must be gone through with other mortgage types. When a seller has their home listed, they want to pick the offer that has the highest chance of making it to the closing table, as fast as possible.
Pros
- 3% down payment minimum
- Mortgage insurance can be canceled with 20% equity
- No maximum income requirements
- Not restricted to rural areas like a USDA loan
- Great to use for vacation homes or rental properties
- Available through most lenders
- Lower closing cost
Cons
- 620 minimum credit score
- Typically 45% DTI maximum
- Potentially higher interest rates
Conclusion
Overall, conventional loans are a great product with competitive advantages. If you are a first time home buyer that doesn’t have a lot of money saved, and a low credit score, this may not be the best option for you. It’s always good to talk to a local bank or mortgage broker to see what program best fits your needs.