What Is a Conventional Loan?
There are scores of mortgage loans, but they generally fall into broad categories: Loans that are insured or guaranteed by the government, such as FHA, VA and USDA loans, and loans not insured or guaranteed by the government, which are called conventional loans.
Although conventional loans are not insured or guaranteed by the government, they follow guidelines set by Fannie Mae and Freddie Mac, two large publicly traded corporations (agencies) formed by Congress to purchase the loans that lenders make.
So, what's the best loan for you? Government-guaranteed or conventional? Because conventional loans generally have fewer restrictions than government-guaranteed loans, lenders may have more discretion to offer their borrowers more flexible terms, features … and benefits.
Conventional Loan Benefits
- Down payments as low as 3%
- Fewer restrictions compared with government-back loans, such as no military affiliation (VA) or rural area (USDA) required
- No upfront mortgage insurance required
- Private Mortgage Insurance (PMI) can be canceled after 20 percent equity is achieved
- Higher credit scores can result in a lower interest rate
- Less strict appraisal and property requirements than FHA, VA or USDA loans
Conventional Loan Requirements
- As with government-backed loans, applicants must show proof of income, assets, and source of down payment or gift
- Minimum FICO score of 620
- Nationwide conventional loan limits of $453,100; up to $679,650 in higher-cost regions
Conventional Loan Options
Many consumers mistakenly believe that these loans require a 20 percent down payment. Although doing so would eliminate the need for Private Mortgage Insurance (PMI), the borrower who makes a smaller down payment can cancel PMI once the mortgage balance is paid down to 80% of the home's original praised value. When the balance falls below 78%, the mortgage servicer is required to eliminate PMI.
For buyers with a stronger credit profile, they will typically find conventional loans a more economical choice than a government-backed loan. And, of course, if they come in with a down payment of 20% or more, they don’t pay any mortgage insurance, unlike FHA borrowers.
Don’t forget to ask about our I CAN mortgage, so you can customize the terms of your loan.