In August 2020, conventional loans comprised 82 percent of all closed mortgages, according to Credible. Clearly, this is a popular form of financing among people buying homes, and one that you might want to take a closer look at if you’re hoping to join the ranks of homeowners soon. What do you need to know about qualifying for a conventional loan?
Qualifying for a Conventional Loan
Before you decide to try your hand at qualifying for a conventional loan, you’ll want to learn what this type of loan is and understand its advantages and disadvantages. Then, review what lenders tend to look for to move forward with confidence.
Defining Conventional Loans
In many ways, a conventional loan is defined by what it isn’t. As the Consumer Financial Protection Bureau explains, a conventional loan is a home loan that isn’t part of a specific government program. While there are countless variations of loans, they fall into two basic categories: conforming and nonconforming. Conforming loans are loans that fall in line with the rules set on loan amounts and other terms by Fannie Mae or Freddie Mac.
Interestingly, some people mistakenly believe that conventional and conforming loans are the same, but that’s not quite true. Much like all cats are animals, but all animals aren’t cats, all conforming loans are conventional loans, but all conventional loans are not conforming loans. After all, nonconforming loans are conventional loans that don’t meet the terms set by Fannie Mae or Freddie Mac. Jumbo loans are one example of nonconforming loans.
Advantages of Conventional Loans
What makes conventional loans so popular with borrowers? As Nerdwallet points out, these loans have some strong advantages:
- More Property Choices: Government-backed loans often come with stringent requirements about what you can and cannot do. Conventional loans provide much greater flexibility when it comes to choosing a property.
- More Loan Choices: Conventional loans come in all shapes and sizes. Choose from fixed-rate or adjustable-rate loans. Opt for a 15-, 20-, or 30-year loan term. With so many possibilities, borrowers with good credit can find a loan that suits their situation.
- Control Over Mortgage Insurance: With a conventional loan, you can dodge the cost of private mortgage insurance (PMI) entirely by making a 20-percent down payment. If that’s not possible, you can end your PMI payments when you reach 78 percent equity. Other types of loans may not have this feature. For example, borrowers with FHA loans must pay for mortgage insurance for the entire life of their loan.
Disadvantages of Conventional Loans
Of course, nothing is perfect. As Experian points out, conventional loans do have some disadvantages:
- Stricter Qualifying Guidelines: Without government-backing, conventional loans are riskier for lenders. To protect their interests, lenders set stricter qualifying guidelines for potential borrowers.
- Higher Credit Score Requirements: Borrowers generally need a credit score of at least 620 to qualify for a conforming conventional loan. For better terms and lower interest rates, a score of 740 is often preferred.
- Higher Down Payment Requirements: Some government-backed loans offer 100-percent financing. With a conventional loan, you’ll need a down payment of at least 3 percent. However, if you hope to secure a low rate, you’ll likely need a more substantial down payment.
Getting Approved for a Conventional Loan
What do you need to qualify for a conventional loan? The exact requirements will vary depending on your situation and the nature of the loan that you are seeking, but Forbes suggests that you should expect a few basic things to be true:
- You will need a credit score of at least 640.
- You will need a down payment of at least 3 percent.
- Your debt-to-income ratio should be under 43 percent.
- The loan amount should be below the conforming loan limit for the area. If you’re seeking a higher amount, you’ll need to meet higher credit standards and provide a larger down payment to secure your loan.