Conventional Loans

Conventional loans are the simplest of mortgages that virtually anyone who meets specific financial requirements can get. While they lack some of the benefits of specialized mortgages, like FHA and USDA, they still have plenty going for them.

The Real Deal Behind Conventional Loansrenovation loans

The world of mortgages can cause your head to spin without lots of research, loads of notes and a firm understanding of the basics. One of the most basic mortgages is the conventional loan. This is the loan that Joe Homebuyer with no special qualifications, requirements or situations would apply for.

While we’ve seen the FHA, VA, USDA and other specialized mortgage programs become more popular in these tightening financial times, the conventional loan remains king. So, here’s what you need to know about a conventional loan.

What Is a Conventional Loan?

A conventional loan is just as its name says: conventional. It means there are no special requirements to get it, so long as you meet its minimum financial requirements.

Conventional mortgages tend to have fixed interest rates and terms, and they require less paperwork to get approved that specialized mortgages. They do, however, have tighter financial requirements that some buyers simply cannot meet, including a higher down payment, lower debt-to-income limits, tighter credit requirements and more.

Conventional Loan Requirements

While the assisted loan programs often have more limitations, conventional loans typically have more stringent requirements. Conventional loan requirements often include a credit score of 620 or higher, a down payment of 3 to 25% and a debt-to-income ratio no higher than 36%.

Fortunately, once you meet a conventional loan’s financial requirements, there is little else you need. For some of the non-conventional loans, you’ll need to prove status as a servicemember, prove the home is in a certain area or prove that you do not make too much money to qualify.

Types of Conventional Loans

While conventional loans are generally simpler than specialty loans, there are some variations of conventional mortgages. The two main categories are conforming and non-conforming.

While there are no conventional loan limits, per se, there are limits for government-backed convention loan programs from Freddie Mac and Fannie Mae. These limits include loan-to-value caps, minimum credit scores, and more.

Non-conforming loans generally do not follow the conventional loan limits imposed by Freddie Mac and Fannie Mae. These sorts of conventional loans include jumbo loans and other riskier products.

How to Get a Deal on a Conventional Loan

Being the most common type of mortgage, conventional loans are also the easiest to apply for. Unlike specialty mortgage programs where you need to seek out particular banks, nearly any bank that offers mortgages also offers conventional loans.

To apply, you can either apply online or head to your local bank to speak with its mortgage department.

One key is to make sure you shop around, though. The mortgage industry is a competitive one, and banks are willing to battle for your business. We suggest starting with a bank that you have a relationship with to get a good baseline. From there, check out several brick-and-mortar banks, then hit up the online mortgage companies.

You’re wondering about your credit score, right? Don’t you get a ding every time a mortgage company pulls your credit? That depends. Yes, the initial credit inquiry will ding your score, but if you keep the amount and terms of all the other credit inquiries the same, you may see only a small hit — or none at all at some credit bureaus — on your credit score for the additional credit inquiries. This process is informally called rate shopping, and it can save you thousands over the course of a loan, so it is worth the few points it may pull away from your credit score.

Benefits of a Conventional Loan

So, what’s the benefit of getting a conventional loan? Sure, the down payment may be higher and the credit requirements may be stricter, but there are reasons to go with one. Here are a few benefits of them:

  • Conventional loan rates are generally lower.
  • You won’t need private mortgage insurance, saving thousands a year.
  • There’s less paperwork involved.
  • You can refinance at any time.
  • There are very few limitations on how you use the property.
  • Anyone can qualify for one.

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