A conventional home loan, also known as a conventional mortgage, is a type of mortgage loan that is not insured or guaranteed by a government agency. Unlike government-backed loans such as FHA, VA, or USDA loans, conventional loans are offered by private lenders such as banks, credit unions, and mortgage companies.
Here are some characteristics of conventional home loans:
- Loan requirements: Conventional loans typically have stricter requirements compared to government-backed loans. Lenders usually require a higher credit score, a stable income, and a lower debt-to-income ratio for borrowers to qualify. Generally, a credit score of 620 or higher is needed, although a higher score may result in more favorable terms.
- Loan-to-value ratio (LTV): The LTV ratio represents the percentage of the home's appraised value or purchase price that the lender is willing to finance. Conventional loans often require a lower LTV ratio compared to government-backed loans. A down payment of at least 20% is typically required to avoid private mortgage insurance (PMI), although some lenders may accept a lower down payment with the inclusion of PMI.
- Interest rates: The interest rates on conventional home loans can vary depending on market conditions, the borrower's creditworthiness, and other factors. These rates can be either fixed or adjustable. Fixed-rate conventional loans have a consistent interest rate throughout the loan term, while adjustable-rate mortgages (ARMs) have an initial fixed-rate period and then adjust periodically according to a specific index.
- Loan limits: Conventional loans have loan limits set by the Federal Housing Finance Agency (FHFA). These limits dictate the maximum loan amount that can be borrowed in a particular area. Loan limits can vary based on the county or metropolitan area and are subject to change annually.
- Private mortgage insurance (PMI): If the borrower makes a down payment of less than 20% of the home's purchase price, private mortgage insurance is typically required. PMI protects the lender in case the borrower defaults on the loan. It is an additional monthly cost that is usually included in the mortgage payment until the loan-to-value ratio reaches 80% or less.
- Repayment terms: Conventional loans offer various repayment terms, commonly ranging from 10 to 30 years. The most popular term is a 30-year fixed-rate mortgage, but shorter terms, such as 15 or 20 years, are also available. Shorter terms generally result in higher monthly payments but lower interest costs over the life of the loan.
Conventional home loans provide flexibility and options for borrowers who meet the stricter requirements. However, it's important to contact a mortgage broker to obtain a valid pre-approval as individual circumstances can vary therefore affecting qualifications and rate.