What You Need to Know About Conventional Loans
A conventional loan is a great option if you have a solid credit score and not too much debt. If you can’t make a larger down payment, many conventional loans are available with as little as 5% down.
Conventional loans are offered by private lenders. They are not backed by the government like FHA and VA loans.
A conventional loan is called conforming when it falls under the borrowing limit set by the FHFA, and nonconforming when it doesn’t. The 2024 limit for a conforming conventional loan is $766,550. Lenders are free to see their own limits for nonconforming conventional loans (aka jumbo loans).
Conventional loans come with fixed or adjustable interest rates. Terms range from 10-30 years. First-time homebuyers can get a conventional loan with only 3% down. For the rest of us, the down payment on a conventional loan is usually 5%-20%.
MORE OPTIONS
Conventional loans offer more choices. They come with fixed interest rates, adjustable interest rates, or a combination of the two.
MORE MONEY
You can borrow more. If your credit score is over 700, you could borrow up to $1.5M. If your credit score is above 740, you could borrow $3M or more.
NO MORTGAGE INSURANCE
If you pay 20% down, you can completely avoid private mortgage insurance. If your down payment is less than 20%, your PMI will automatically stop once your home equity reaches 22%. By comparison, if you get an FHA loan and pay less than 20% down, you will be required to pay a mortgage insurance premium for the entire life of the loan.
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So why doesn’t everybody get a conventional loan?
For one, qualifying for a conventional loan is harder than a government-backed one. If your credit score is under 620, it’ll be more challenging.
And, FHA loans can be approved for borrowers with debt-to-income ratios up to 50%, but many lenders will not approve conventional loans for borrowers a debt ratio higher than 43%.
