What is a home conventional loan?

What is a Conventional Home Loan?

Perhaps the best way to view a conventional home loan is as an independent borrowing option for a unique type of homebuyer. As we will review, a conventional home mortgage can have benefits and drawbacks, but it is traditionally considered to be an excellent option for homebuyers with substantial financial means and stability.

In short, a conventional home loan is a mortgage that is not insured, guaranteed, or backed by any type of federal government agency. Government-backed loans like those offered through the FHA (Federal Housing Authority) must be provided by an FHA-approved lender. Other government agencies that insure home loans include the VA (U.S. Department of Veterans Affairs) and USDA (U.S. Department of Agriculture). 

An FHA Loan versus a conventional loan for first time home buyers:

Federally insured loans are created for individuals in need of financing assistance. That can mean any number of things including less-than-perfect credit scores, first-time homebuyers with limited income, and a lack of means in terms of a down payment. By contrast, a conventional home loan is designed for borrowers with less of a need for financing assistance. Such borrowers tend to have excellent credit history, a stable career with an annual income that is above the national average, and access to a sizeable down payment. In other words, the type of borrower who tends to access a conventional home loan is one who would meet the traditional definition of ‘financially secure.’

Conventional home loan requirements are typically more stringent than standard requirements for an FHA loan. 

In terms of down payment requirements, FHA loans have a minimum down payment of 3.5% for borrowers with credit scores of 580 or higher. A select number of conventional home loans allow a 3% minimum down payment, but this option is reserved for borrowers who have credit scores in the high 600s and can demonstrate ample savings. 

In terms of credit requirements, a credit score between 500 and 579 will likely qualify a borrower for an FHA loan with a 10% down payment. Conventional loans, however, typically require a credit score of 620 or higher. If a conventional loan borrower has a lower credit score, their loan often includes a higher interest rate.

For those who aren’t familiar with the term, a debt-to-income ratio (DTI) is the percentage of an individual’s monthly pretax income that he or she spends to pay debts, including mortgage, student loan, auto loan, child support, and minimum credit card payments. The higher one’s DTI, the more likely he or she is to struggle with paying bills.

Your DTI is factored into the equation when determining whether or not you will qualify for an FHA or conventional loan. For an FHA loan, a borrower’s DTI must be 50% or less. Conventional loans can allow debt-to-income ratios of up to 50% in some cases, but approval is more likely for mortgage borrowers with DTIs of 43% or less.

While qualifications for conventional home loans tend to be greater than typical FHA loans, for borrowers who are able to meet the requirements the advantages are often considerable.

Some advantages of conventional home loans:

  • Easy application process
  • Less paperwork
  • Fewer rules and regulations to meet
  • More options to choose from and greater flexibility with loan terms
  • Easier to individualize according to borrower’s financial situation and goals
  • Can be used to purchase various property types including: single and multi-family homes, condominiums, and manufactured homes
  • No required mortgage insurance if at least a 20% down payment or 20% equity when refinancing
  • Potential for lower rates with a financially stable (perceived as low risk) borrower

Conventional home loans are available for individuals seeking either a new home purchase or refinancing. Though the qualification process can be more rigorous and selective given the increased financial requirements, conventional home loans are enticing for financially stable borrowers because they offer increased flexibility and reduced restrictions when compared to federally insured loans. 

With a conventional loan through Global Realty & Finance, we are able to set the unique terms of the loan according to the needs and desires of you, the borrower. We work directly with you to ensure that, because you are an excellent candidate with financial security, you are treated as such and have access to a loan with all the advantages outlined above. 

Government-backed loans, on the other hand, have terms set by the federal government who then insures or guarantees the loan, protecting the lender in the event a borrower defaults on the mortgage.

Types of conventional loans from Global Realty & Finance:

We offer both fixed and adjustable rate conventional mortgages. How do you know which type is best for you? Let’s take a look at the specifics:

Fixed rate loans:

  • Interest rate does not change for the life of loan 
  • 15 and 30 year fixed home mortgage rates available
  • Stable, predictable payments 
  • Monthly payments usually very low because they’re spread out over time
  • Ideal for homebuyers planning to stay in the house for at least seven years

Adjustable rate loans:

  • Interest rate that does change
  • Typical fixed rate up-front period of one year
  • During the initial year, the interest rate and monthly payments are often lower than a fixed-rate mortgage.
  • Ideal for homebuyers who do not plan to stay in their home beyond a typical interest rate term period, which can be 3, 5, 7, or 10 years.

Why choose a conventional home loan from Global Realty & Finance?

For borrowers who do not require the type of financing assistance offered through loans secured by a government entity, a Global Realty & Finance conventional home loan can be an outstanding option. We can provide you with the lowest possible rate commensurate with your overall financial stability while structuring the loan according to your specifications in terms of flexibility, easy application process, etc. 

To discuss your options and the advantages of a GRF conventional home loan, contact us today. 

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