Conventional loans are a popular home loan option because they work for a wide range of buyers. But will a conventional loan work for you?
Here’s what you need to know about conventional home loans.
What is a Conventional Loan?
A conventional loan is a home loan that is not backed by a federal department. While some home loans are insured by government entities (like the FHA, VA, or USDA), conventional loans are not.
What does this mean for you? It means you’ll need to have solid credit and income to assure lenders that you will repay your loan. Since the lender doesn’t have the security of government-backing on your loan, they are extra careful about confirming creditworthiness for conventional borrowers.
Who is eligible for a conventional loan?
Every lender has their own criteria, but in general terms, lenders like to see the following from conventional borrowers:
Good credit. Lenders want to see a score of at least 620. But the higher, the better! With a higher credit score, you can typically qualify for a lower interest rate, which means a lower monthly payment.
A 3% down payment (or more). You need to put at least 3% down with a conventional loan. But if you can put 20% down, you can avoid paying for private mortgage insurance (PMI).
A reasonable debt-to-income ratio (DTI). Lenders typically want conventional borrowers to spend less than 36% of their income on debt payments (like their new mortgage plus any car loans, student loans, etc).
Pros and Cons of Conventional Loans
Conventional loan pros:
They work for any property type. Government-backed loans are typically only available for your primary residence, but conventional loans can also be used to finance vacation homes, rental properties, or even commercial property.
You can cancel your PMI once you have enough equity in the home.
There are no “program fees” like you often see with government-backed loans.
You can choose from more flexible loan terms. Conventional loans come in fixed-rate or adjustable-rate options and different repayment periods.
Conventional loan cons:
Qualifying for a conventional loan can be harder than qualifying for government-backed loans.
There is no 0% down payment option with conventional loans.
What if I Don’t Qualify for a Conventional Loan?
If you don’t qualify for a conventional loan, don’t worry; homeownership can still be within your reach!
Government-backed loans can be a good alternative, depending on your situation. Here are the most common options for borrowers who don’t qualify for a conventional loan:
VA loans: Available only to military service members, veterans, and their spouses, VA loans provide benefits like 0% down payments and no PMI.
FHA loans: Ideal for buyers with credit issues, FHA loans were created to make homeownership more accessible to the general public.
USDA loans: Reserved for smaller towns and rural areas, you can get a 0% down payment USDA loan if you’re searching within a qualifying rural area.
We’re Here to Help!
At Sequoia Real Estate, we understand that buying a home can feel overwhelming. And we’re here to make the process simple and enjoyable for you. We can put you in touch with lenders who can advise on the best home loan option for you, and even get you pre-approved so you’ll know exactly how much you can borrow. Contact us today to start your home search!