WHAT IS A CONVENTIONAL HOME LOAN?
A conventional loan is a mortgage that is not backed or guaranteed by the federal government. These loans are popular among borrowers with stable income, the ability to make a down payment, and overall financial stability.
With a conventional loan, the lender sets the loan terms and works directly with the borrower, unlike government-backed loans, which follow terms set by federal programs.
Is a Conventional Loan Better Than an FHA Loan?
Conventional loans are a strong option for both new home purchases and refinancing. While first-time homebuyers may find FHA loans easier to qualify for due to lower credit and financial requirements, conventional loans offer more flexibility and fewer restrictions—especially if you can make a 20% down payment.
Advantages of Conventional Loans:
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Simpler process: Less paperwork and fewer rules make it easier to apply and qualify.
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Flexible terms: Loan terms can be customized to fit your financial goals.
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Property options: Can be used for single- and multi-family homes, condos, and even manufactured homes.
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No mortgage insurance with 20% down: If you put at least 20% down when buying or have 20% equity when refinancing, mortgage insurance is not required.
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Potentially lower rates: Borrowers who are financially stable may secure lower interest rates.
Types of Conventional Loans:
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Fixed-Rate Mortgages: Interest rate stays the same for the life of the loan. Common terms are 15 or 30 years, offering predictable monthly payments and lower long-term costs—ideal if you plan to stay in your home for seven or more years.
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Adjustable-Rate Mortgages (ARMs): Start with a fixed lower rate for an initial period (3, 5, 7, or 10 years), then adjust periodically based on market rates. ARMs are best for those planning to move before the rate changes.
Lowest Down Payment:
Some conventional loans allow a minimum down payment of 3%. If your down payment is less than 20%, private mortgage insurance (PMI) is required but can be removed once you reach 20% equity. Tip: A larger down payment reduces your overall mortgage cost.
Why Sellers May Prefer Conventional Loans:
Conventional loans often require higher credit scores and larger down payments. Sellers may see buyers with conventional loans as lower risk and more reliable, making your offer more attractive.