What is a Conventional Mortgage?
A conventional mortgage is a type of home loan that is not insured or guaranteed by the government. This means that the lender bears all the risk of default, so they have stricter lending requirements than government-backed loans like FHA and VA mortgages.
Conventional mortgages are the most common type of mortgage in the United States, accounting for over 70% of all home loans. They offer a variety of benefits, including:
- Lower interest rates than government-backed loans
- More flexibility in terms of down payment requirements
- No mortgage insurance premiums (MIP)
However, conventional mortgages also have some drawbacks, including:
- Stricter lending requirements
- Higher closing costs
- Less lenient late payment penalties
Who Should Use a Conventional Mortgage?
Conventional mortgages are a good option for borrowers who have good credit and a high down payment. They also offer more flexibility than government-backed loans, so they may be a better fit for borrowers with unique financial circumstances.
Here are some of the people who might be good candidates for a conventional mortgage:
- Borrowers with a credit score of 700 or higher
- Borrowers with a down payment of 20% or more
- Borrowers who want more flexibility in terms of their loan terms
- Borrowers who don’t qualify for a government-backed loan
Types of Conventional Mortgages
There are several different types of conventional mortgages, each with its own set of requirements. Some of the most common types include:
- Conforming loans: These loans meet the lending standards set by Fannie Mae and Freddie Mac. They are the most common type of conventional mortgage.
- Jumbo loans: These loans exceed the conforming loan limits set by Fannie Mae and Freddie Mac. They typically require a higher down payment and have stricter lending requirements.
- High-balance loans: These loans are for borrowers who want to borrow more than the conforming loan limit, but not as much as a jumbo loan. They typically have stricter lending requirements than conforming loans.
- Non-conforming loans: These loans do not meet the lending standards set by Fannie Mae and Freddie Mac. They are typically available to borrowers with lower credit scores or higher debt-to-income ratios.
How to Qualify for a Conventional Mortgage
The requirements for qualifying for a conventional mortgage vary depending on the type of loan you are applying for. However, some of the general requirements include:
- A credit score of 700 or higher
- A down payment of 20% or more
- A debt-to-income ratio of 36% or lower
- A stable income and employment history
You will also need to provide documentation of your income, assets, and debts. Your lender will use this information to determine your eligibility for a loan and the terms of your loan.
Closing Costs for Conventional Mortgages
The closing costs for a conventional mortgage are typically higher than those for government-backed loans. This is because the lender bears all the risk of default, so they need to charge more in fees to cover their costs.
The closing costs for a conventional mortgage can vary depending on the lender, the type of loan, and the state in which you are buying a home. However, you can expect to pay anywhere from 2% to 5% of the purchase price of your home in closing costs.
Is a Conventional Mortgage Right for You?
If you have good credit and a high down payment, a conventional mortgage may be a good option for you. They offer lower interest rates than government-backed loans and more flexibility in terms of loan terms. However, they also have stricter lending requirements and higher closing costs.
If you are not sure whether a conventional mortgage is right for you, talk to a lender to get pre-approved for a loan. This will give you an idea of what you can afford and what your options are.
Conclusion
Conventional mortgages are a good option for borrowers who have good credit and a high down payment. They offer lower interest rates than government-backed loans and more flexibility in terms of loan terms. However, they also have stricter lending requirements and higher closing costs.
If you are considering buying a home, talk to a lender to get pre-approved for a loan. This will give you an idea of what you can afford and what your options are.