A conventional loan is like the old reliable of mortgages—provided by private lenders (not the government), it’s straightforward, flexible, and widely used. If FHA, VA, and USDA loans are like souped-up, specialized cars, then a conventional loan is the classic, no-frills option. It follows the rules set by Fannie Mae and Freddie Mac, but it doesn’t come with the extra layers of government red tape. That often means a smoother ride for borrowers.
Why are conventional loans so popular?
Flexible Terms:
You can customize a conventional loan to fit your life. Want to pay off your house faster? Go with a 15-year loan and save big on interest. Prefer smaller monthly payments? Opt for a 30-year loan.
Example: With a 15-year loan, you’ll own your home outright in half the time, while a 30-year term keeps more cash in your pocket every month.
Lower Costs (If You’ve Got Good Credit):
Got a solid credit score? A conventional loan rewards you with lower interest rates than government-backed loans. Plus, if you put down 20%, you skip Private Mortgage Insurance (PMI) altogether.
Example: If you’ve got excellent credit and can put 20% down, you’ll not only dodge PMI, but also score a lower monthly payment.
Efficient Processing:
Conventional loans are the bread and butter of the mortgage world, so lenders have streamlined the process. That often means faster approval and less paperwork than government-backed loans.
Example: Since conventional loans are so common and have less strict property requirements, you’re likely to have a quicker, smoother process with fewer hiccups along the way.
What do you need to get a conventional loan?
Credit Score:
Most lenders want to see a credit score of at least 620. If you’re above 700, you’re looking at even better rates.
Example: A credit score of 700+ could get you lower interest rates which will save you money over the course of your loan.
Down Payment:
The minimum is usually 3%, but if you want to dodge PMI, aim for a 20% down payment.
Example: A 20% down payment not only helps you skip PMI but also makes your offer stronger in a competitive market. That being said, 20% is quite a bit higher than what most buyers put down. The typical first time buyer puts down around 7-8% and a standard repeat buyer puts a little over double that down (so if you don’t have the golden 20% downpayment; don’t sweat it).
Income and Asset Verification:
You’ll need to prove your financial health with pay stubs, bank statements, and debt info. It’s like showing lenders a full financial report card.
Example: Be ready with documentation to show your lender that you’ve got the stability to pay back the loan.
Debt-to-Income Ratio (DTI):
Most lenders want to see a DTI ratio of 43% or lower (meaning your monthly debt payments shouldn’t eat up more than 43% of your gross income).
Example: Keeping your DTI low could help you secure a better loan and increase your chances of approval.
Property Types:
Conventional loans aren’t picky—they cover everything from single-family homes to vacation homes and investment properties, as long as the property meets the lender’s criteria.
Example: Want a second home or an investment property? A conventional loan has the flexibility to make it happen.
Why do sellers love conventional loans?
Fewer Appraisal Issues:
Conventional loans usually have fewer strings attached when it comes to appraisals, which means fewer repair requests and smoother deals. If a house needs minor fixes, a conventional loan isn’t likely to hold up the sale with a bunch of appraisal red tape, whereas government loans like a VA or FHA might.
Stronger Buyer Profile:
Sellers see conventional loan buyers as having stronger financials—bigger down payments and higher credit scores make for more reliable transactions.
Faster Closing:
Because conventional loans typically involve less paperwork, they can close faster than FHA loans. In competitive markets, that’s a huge plus, because a quicker closing can mean the difference between winning and losing out on your dream home.
Are conventional loans assumable?
Most of the time, conventional loans aren’t assumable—meaning the new buyer can’t take over your loan. When selling, the buyer will likely need to get their own financing.
Example: If you’re selling your house, the new buyer will need a fresh mortgage instead of taking over your existing conventional loan.
However, there are some exceptions. In rare cases, some conventional loans may have an assumability clause, but you’d need lender approval, and it’s not common.
Alternatives to Conventional Loans:
If you’re dead set on an assumable loan, FHA and VA loans are generally assumable, letting the new buyer take over the loan’s terms. That could be a perk when selling if your loan has a sweet interest rate.
To sum it all up
In a nutshell, conventional loans are the go-to choice for most buyers. They’re flexible, straightforward, and give you a ton of options, whether you’re buying a primary residence, vacation home, or investment property.
The no-nonsense terms and lower fees make it the most popular option in the mortgage market. If you’ve got solid credit and can handle the down payment, a conventional loan might just be the best fit for your home-buying needs.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.