Conventional loans are the most common types of loans in the mortgage industry. They’re funded by private financial lenders and then sold to government-sponsored corporations Fannie Mae and Freddie Mac.
These loans have stricter requirements than FHA loans. You’ll need a higher credit score and a lower debt-to-income ratio (DTI) to qualify for a conventional loan than you would with an FHA loan.
The Benefits Of A Conventional Loan
- You can make a down payment as low as 3%.
- If your down payment is at least 20%, you can avoid paying private mortgage insurance (PMI).
- In most counties, you can typically borrow more than you can with an FHA loan.
- Mortgage rates are typically lower for conventional loans than FHA loans.
The Cons Of A Conventional Loan
- You’ll have to pay PMI if your down payment is less than 20% of the loan amount.
- The loan qualifications are stricter, requiring a minimum credit score of 620 and a lower DTI.
Conventional Loans And Mortgage Insurance
PMI is a type of mortgage insurance unique to conventional loans. Like mortgage insurance premiums do for FHA loans, PMI protects the lender if the borrower defaults on the loan.
You’ll have to pay PMI as part of your mortgage payment if your down payment was less than 20% of the home’s value. However, you can request to remove PMI when you have 20% equityin the home. Once you’ve reached 22% home equity, PMI is often removed from your mortgage payment automatically.
Unlike mortgage insurance for FHA loans, PMI offers different payment options. Borrower-paid PMI, or BPMI, does not require an upfront cost, and depending on the lender, you can request to have it canceled once you’ve reached 20% equity in your home. In most cases, it’s automatically removed once you reach 22% equity.
Lender-paid PMI, or LPMI, is paid for you by your lender. The lender will raise your mortgage interest rate to incorporate the insurance payment they make on your behalf. This option may result in lower payments, but it’s typically not cheaper over the life of the loan. LPMI can’t be canceled because it’s built into your interest rate.
Is A Conventional Loan Right For You?
A conventional loan is a great option if you have a solid credit score and little debt. You can avoid PMI by paying 20% of the loan upfront, which will lower your mortgage payments.
If you’re unable to make a large payment upfront, conventional loans are available with a down payment as low as 3%. In most cases, borrowers save money in the long run with a conventional loan because there’s no upfront mortgage insurance fee and the monthly insurance payments are cheaper.