What is a conventional loan?

A conventional loan is any loan that is not backed by a government agency. Conventional loans typically cost less than government loans, like FHA loans, but they can be more difficult to get. They are known for having better rates and terms, as well as lower fees. Conforming conventional loans typically have to meet lending guidelines set by Fannie Mae or Freddie Mac.

Who qualifies for a conforming conventional loan?

In general, to qualify for a conventional loan, a borrower must meet the following requirements:

• Credit score of 620 or higher
• Proof of reliable income
• 5% down payment (some programs are available for first-time homebuyers to only put 3% down)
• A debt-to-income ratio of up to 50%

Conventional Loan Pros

Here are the Pros of Conventional Loans.

• Less expensive than government loans – government loans typically have up-front mortgage insurance. In addition, the APR on some government loans can sometimes be higher. By contrast, conventional loans only have monthly mortgage insurance which goes away once your house’s loan to value drop below 80%.
• Flexibility of loan terms – conventional loans offer more flexibility including choice of loan terms as well as flexibility of interest rate options
• More flexible loan conditions – while conventional loans still have to meet federal mortgage guidelines, the documentation required for a conventional loan is less strict than the documentation required for other types of loans
• More attractive to sellers – the current market is very much a seller’s market, and some sellers find government loans less attractive. If you are able to qualify for a conventional mortgage, it can make your purchase offer more competitive

Conventional Loan Cons

Here are the Cons of Conventional Loans.

• Stricter eligibility requirements – to qualify, conventional loans require a lower debt threshold and a higher credit score. Because conforming loans are sold to Fannie Mae or Freddie Mac, they have to meet their investor guidelines, and if you have a high level of debt or a low credit score, you may find it difficult to qualify.
• Stricter requirements regarding past foreclosures and bankruptcies – The eligibility criteria for government backed loans is more relaxed when it comes to foreclosures and bankruptcies, and as a result, they are forgiven much faster than with conventional loans. Homebuyers with recent bankruptcies or foreclosures which would otherwise be approved may need to wait longer before a lender approves them for a conventional loan.