Everything to Know About a Conventional Loan: Benefits, Tips and More

For the month of November, we’ll be deep diving into three main types of home loans. Each post will cover a unique loan type, including its benefits, requirements and tips for potential borrowers. We hope this series will be helpful to you when researching the type of loan you’ll consider when buying your next home. First up, everything to know about a conventional loan!

When looking for the right home loan, a conventional loan is often the first choice for many buyers. Unlike government-backed loans, conventional loans come from private lenders and are more common among buyers with strong credit. In this post, we’ll explore the requirements, benefits and drawbacks of conventional loans to help you determine if this loan type is the right choice for you.

What Is a Conventional Loan?

A conventional loan is a mortgage not backed by the government, which distinguishes it from loans like FHA, VA and USDA loans. There are two main types:

• Conforming loans: These meet the standards set by Fannie Mae and Freddie Mac.
• Non-conforming loans: These do not meet these standards, often because they exceed loan limits or are “jumbo loans” for high-priced properties.

Key Requirements

Conventional loans often have more stringent qualification requirements, including:

• Credit Score: Lenders generally require a credit score of 620 or higher.
• Down Payment: Down payments range from 3% to 20%, with many buyers putting down 10-20%. For down payments under 20%, borrowers must pay Private Mortgage Insurance (PMI) until they reach 20% equity.
• Debt-to-Income Ratio (DTI): Lenders often prefer a DTI below 43%, though some will consider borrowers with slightly higher DTIs if other aspects of their finances are strong.

Pros and Cons of Conventional Loans

Pros:

• Flexible Terms: With options ranging from 10 to 30 years, borrowers can choose terms that suit their financial goals.
• Broader Property Eligibility: Conventional loans cover a wide range of property types, including investment properties.
• PMI Flexibility: Once you reach 20% equity, PMI can be removed, lowering your monthly payments.

Cons:

• Higher Requirements: Conventional loans are harder to qualify for if you have lower credit or higher debt.
• Less Leniency in Income Verification: If you’re self-employed or have an unconventional income stream, conventional loans may be challenging.

Ideal Candidates for Conventional Loans

Conventional loans are best suited for buyers with stable finances, good credit and the ability to put down at least 5-10%. They’re also a great option for buyers looking to finance properties that may not qualify under FHA or VA guidelines.

Application Process

1. Pre-Approval: Get pre-approved by providing income, employment and financial information to estimate your budget.
2. Documentation Submission: Gather financial records, including tax returns, pay stubs and bank statements.
3. Underwriting: Lenders review your application to assess creditworthiness.
4. Approval & Closing: Once approved, you’ll receive a closing date and finalize the loan.

Conventional loans offer competitive terms and flexibility for those who meet the requirements. Whether you’re buying your first home or investing, talk to a lender (our KC preferred vendor is Meggan McDonald with Supreme Lending about your options to see if a conventional loan is the best fit. If this blog still hasn’t given you everything to know about a conventional loan, you can also reach out to your realtor to help you walk through the options.