A conventional mortgage loan is an excellent program, but it is not always the best option. If you are in good financial standing, you can benefit greatly from the loan’s borrowing terms. However, for low-income home buyers and home buyers with low credit scores, conventional mortgage loans often turn out to be more costly than other types of home loans.
What is a conventional loan?
A conventional mortgage or conventional loan is a type of home loan only available through a private lender like your local bank, credit union, or mortgage company. Unlike VA, FHA, and USDA home loans, conventional mortgage loans are not offered, secured, or insured by the federal government.
What affects conventional loan rates?
Conventional mortgage loans are the most credit-sensitive of all loan types. As a result, the rates and lender credit can be unfavorable if you have a lower credit score. Typically, you’ll need a credit score of 620 to even qualify for a conventional mortgage loan. But ideally, you should have a credit score of over 700 to get the best rates.
Although conventional loan rates can be incredibly low, the mortgage insurance for these types of loans can be high if you are putting less than 10% down. You can avoid mortgage insurance by putting at least 20% down. If you put less than 20% down, you’ll have to pay for mortgage insurance, but it will drop off automatically when you get to a 78% loan to value (22% equity) position. This can occur naturally by making your payments as agreed or can be accelerated by making extra payments toward your balance owed.
An increase in your equity can also remove your mortgage insurance. By making home improvements, you can increase your home’s value. A home’s value in an appreciating market will rise as well. When you get to an 80% loan to value (a 20% equity position) you can request that your lender remove your mortgage insurance.
As a rule of thumb, the more you put down with a conventional mortgage loan, the lower your mortgage insurance will be.
The loan amount also affects your conventional mortgage rate. You will get the best deal if your home loan is over $200,000.
Given that the benefits of conventional mortgage loans hinge on your financial health and credit score, they are best for home buyers who:
Have a 700+ credit score
Can put at least 5% down
Are taking out a loan amount of over $200,000
This scenario will allow for an excellent lender credit to reduce or eliminate the closing costs, allowing for elite pricing.
FHA vs conventional loan
If you can only make a 3.5% down payment and have a sub 680 credit score, the best route may actually be an FHA loan. While this program does have mortgage insurance, a conventional program would also include insurance at similarly low down payment rates.
The benefits of FHA loans are lower rates and a larger lender credit that can drastically reduce closing costs. The result is a lower monthly payment and less cash to close than the conventional route.
The drawback of an FHA loan is that the mortgage insurance never drops off like a conventional loan. However, most FHA borrowers are first time home buyers and will most likely not keep their first home long enough for the mortgage insurance to drop off naturally if they chose a conventional loan.
VA loan vs conventional
If you qualify for a VA Loan due to military service, this almost always is the best route to go. Notably, a VA Loan does not have monthly mortgage insurance. You’ll also be able to take advantage of government rates and lender credits. Find out if a VA Loan can help you.
Conventional vs USDA
If you would like to buy a home in a rural or suburban area, there is a good chance a USDA loan would be the best option. Learn more about the minimum requirements for a USDA loan.
The bottom line on conventional mortgage loans
If you have a high credit score, can make a larger down payment, and are buying a home valued at more than $200,000, conventional is a great program. But it is not a one-size-fits-all loan. You should talk to a trusted Loan Officer to find out if a conventional mortgage loan is right for you.
DC Lending is a family-owned mortgage company based in Vancouver, Washington. For two generations, we’ve helped home buyers in Washington and Oregon achieve their dreams of homeownership. Along with conventional mortgage loans, we offer a wide range of competitively priced home loans including FHA, VA, Nationwide High Balance, and Jumbo. Fill out our quick online quote form or contact one of our Loan Officers to learn more about your home loan options.
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