If you’re considering buying a home, the term “conventional loan” might have caught your attention. But what exactly is it, and how does it work? First, we’ll explore the eligibility requirements, and upfront costs including down payment and closing costs then we will explore interest rates, monthly mortgage payments, and the impact of mortgage insurance on conventional loans. By understanding these factors, you can determine if a conventional loan is the right fit for you.
Eligibility Requirements for a Conventional Loan
There are four reasons the conventional home loan maybe be the right choice for you.
To start, with a down payment as low as 3%, it’s an attractive option for first-time home buyers. Second, if you’re a non-first-time buyer or have a median income of ≤80%, a 5% down payment requirement is still reasonable. Third, conventional loans offer the flexibility to purchase multi-unit properties with a 15% down payment or second homes with at least a 10% down payment. Lastly, the option of an adjustable-rate mortgage with a minimum down payment of 5% provides added versatility. Consider these factors to see if a conventional home loan aligns with your goals of homeownership.
Understanding Conventional Loans
Gaining a better understanding of conventional home loans can help to create a stress-free and easy homebuying experience. By empowering you with knowledge about eligibility, down payment options, and the overall process, you can buy a home with confidence.
Versatility in Property Types
One advantage of conventional loans is their versatility in purchasing various property types. Whether you’re looking for a primary residence, a second home, or an investment property, conventional loans can be used for single-family homes, multi-unit properties, and condominiums.
Types of Conventional Loans
There are two types of conventional loans: conforming and non-conforming. Conforming loans adhere to guidelines set by Fannie Mae and Freddie Mac, offering lower interest rates and better terms. Non-conforming loans do not meet these guidelines and are usually provided by private lenders.
How Conventional Loans Work
When you apply for a conventional loan, lenders assess your creditworthiness by evaluating factors such as credit history, income, employment, and more. If approved, you’ll receive an interest rate and loan terms, including the duration and monthly payment.
Cost of A Conventional Loan
There are a number of costs to consider when looking at the affordability of a conventional home loan. These costs can be broken down into two main categories: upfront costs and monthly mortgage payments.
Upfront Costs of Conventional Loan
The upfront costs of the conventional loan include down payment and closing costs. If able the buyer can elect to pay the PMI (private mortgage insurance) upfront or negotiate a seller credit to cover the cost.
Down Payment
When it comes to down payment it will be largely based on if you are a first-time home buyer and what type of property you are looking to buy. Below is a breakdown of the upfront down payment requirement for each type of property when using the conventional loan.
| Property Type | Down Payment Requirement |
|---|---|
| First-time Homebuyer | 3% |
| Non-first-time buyers or ≤80% median income | 5% |
| Multi-unit property | 15% |
| Second home | 10% |
| Adjustable-rate mortgage | 5% |
Closing Costs
Closing costs include fees such as loan origination, appraisal, credit report, title search, title insurance, and attorney services. While the specific amount can vary based on factors such as the loan amount, property location, and lender, a general rule of thumb is to budget around 2% to 5% of the home’s purchase price for closing costs.
When it comes to closing costs it’s important for you to carefully review the Loan Estimate provided by the lender, which outlines the estimated closing costs. Prepare that unless your agent negotiates a credit with the seller you will need to pay these closing costs at the time you wire your down payment.
Private Mortgage Insurance
If your down payment is less than 20%, your mortgage lender will require private mortgage insurance. PMI protects the lender in case of default and adds an additional monthly fee for the homeowner. However, once your loan balance reaches 80% of the home’s value, you can request PMI removal.
Some buyers pay their PMI as an upfront fee included in their closing costs, but usually, it is paid as part of your monthly mortgage payment. While other buyers pay it in the form of a slightly higher interest rate. All in all, choosing how to pay for PMI is a matter of running the numbers to figure out which option is best for you.
Monthly Mortgage Payment of Conventional Loan
Your monthly mortgage payment is based on the amount of cost (down payment closing, and PMI) you pay upfront, the purchase price of the home you are buying, and the mortgage interest rate you qualify for.
What are the interest rates for conventional mortgages?
Interest rates for conventional loans change daily. Rates are usually a bit lower than FHA loan interest rates and slightly higher than VA loan interest rates. It is important to know that the actual interest rate you get will be based on your personal situation.
While many sites can give you estimated interest rates, the best way to see your actual interest rate for a mortgage is to apply. When you apply with our Savvy Mortgage Partners, with our Power Buyer Approval® , you’ll be able to see your real interest rate and estimated payment without any commitment.
Monthly Mortgage
When it comes to your monthly payment it will include both principal and interest. All things considered, you can get an idea of what your monthly mortgage payment will be with our online mortgage calculator. These numbers will change slightly depending on home location and length or loan term.
For a more precise breakdown of your estimated monthly mortgage, you will need to meet with a mortgage expert.
Comparing Conventional Loans to Other Home Loan Types
When considering which loan product is right for you it is important to understand the difference between them in terms. Please note that below is an overview, and there may be additional factors and details to consider. We recommend consulting with a mortgage professional or lender for a comprehensive comparison and personalized advice based on your specific circumstances.
Conventional vs VA Loan
In comparing the conventional loan and VA loan it is easy to see they are very different. Primarily in who is eligible to qualify for the loan. The ability to use the VA Home Loan is tied to an act of military service and conventional eligibility rests solely on financial abilities. Here are some other key factors that set these loan options apart:
| Conventional Loan | Va Loan | |
| Down Payment | Varies (typically 5% or more) | No down payment required |
| Mortgage Insurance | Required if the down payment is less than 20% | No mortgage insurance required |
| Eligibility | Open to anyone who meets the requirements | Exclusively available to veterans, active-duty service members, and their surviving spouses |
| Funding Fee | Not applicable | Required, ranges from 1.25% to 3.3% of the loan amount |
| Occupancy Requirement | No specific occupancy requirement | Property must be occupied by the borrower |
Conventional vs FHA Loan
When comparing conventional loans and FHA loans, one of the most significant differences lies in the eligibility criteria. Key factors between these loans include:
| Conventional Loan | FHA Loan | |
| Down Payment | Varies (typically 3% or more) | As low as 3.5% |
| Mortgage Insurance | Lower loan limits set by the county | Required, including upfront and annual premiums |
| Credit Requirements | Typically higher credit score required | More lenient credit score requirements |
| Property Eligibility | Can be used for a variety of property types | Primarily for owner-occupied single-family homes |
| Required if the down payment is less than 20% | Higher loan limits available | Typically higher credit scores required |
Conventional vs USDA Loan
The most notable disparity between conventional loans and USDA loans, with a primary distinction being the property\’s location. While conventional loans offer flexibility for a variety of property types, USDA loans are limited to mostly rural areas.
| Conventional Loan | USDA Loan | |
| Down Payment | Varies (typically 3% or more) | No down payment required |
| Mortgage Insurance | Required if the down payment is less than 20% | Required, including upfront and annual fees |
| Property Eligibility | Can be used for a variety of property types | Limited to eligible rural and suburban areas |
| Income Eligibility | No specific income restrictions | Income limits based on area and household size |
| Required if the down payment is less than 20% | Can be used for primary residences, second homes, and investment properties | Primarily for primary residences in eligible areas |
In conclusion, conventional loans provide competitive interest rates, flexible terms, and a range of options. To determine if it’s the right fit for you, evaluate the eligibility requirements, down payment, and monthly mortgage, and consider the impact of mortgage insurance. By understanding these factors, you can make an informed decision about whether a conventional loan aligns with your homeownership goals.
Ready to explore your home loan options? Complete our Power Buying Approval® now for personalized guidance on finding the best home loan for your needs.
