Buying a home is overwhelming as it is, but even more so when you aren’t hip to all of the lingo. A mortgage broker can help you put things into context, but you still mind find yourself asking questions like “what the heck makes a loan ‘conventional’ anyway”? In this article, we’ll break down what conventional loans are and when you may want to pursue one.
What Is a Conventional Loan?
Conventional loans make up the majority of home loans. Put simply, they are loans that don’t originate from a government entity. Instead, they come from private lenders.
According to the Consumer Finance Protection Bureau, conventional loans can be a little bit harder to obtain than other loan types. Because they are not insured by any government entity, lenders are more cautious with who they offer them to. The logic for this is simple: if a borrower defaults on a conventional loan, the lender takes the hit.
Therefore, conventional loans often have much stricter credit score and higher down payment requirements. This is because, in general, borrowers in good financial standing are far less likely to default on a loan. When you have good credit, you’re demonstrating that you can responsibly pay back a debt.
How Do I Know If I Qualify For One?
Being able to make a relatively sizable down payment and having a good credit score are your friends when it comes to getting conventional loans. While each lender has unique requirements, most sources state that conventional loans typically require a credit score of 620 or higher and a down payment of at least 20%. These can be steep requirements for some lenders. If you can’t make a down payment that large, you may still be able to qualify for certain conventional loans by paying private mortgage insurance (PMI), but that will ultimately make your monthly payment more expensive.
Let’s do a quick recap. Conventional loans:
- Aren’t offered by any government agency.
- Can be somewhat harder to get because of their high credit score and down payment requirements.
- Can end up being more expensive in the long run if they require you to purchase PMI.
The takeaway: Conventional loans make up the majority of home loans, but that doesn’t mean they are for everyone. If you’re a borrower who has a lower credit score or are unable to make a substantial down payment, then a conventional loan may not be a viable option for you.
This article is one in a series about different types of home loans. For the next article in the series, click here.
Disclaimer: These articles are intended for general informational purposes only and do not substitute the advice of qualified mortgage professionals. Please always consult your mortgage broker or loan officer when it comes to making decisions.