What Is A Conventional Loan?

Conventional loans, the most popular type of mortgage, come in two flavors: conforming and non-conforming.

• Conforming loans: A conforming loan “conforms” to a set of Federal Housing Finance Agency (FHFA) standards, including guidelines around credit, debt and loan size. When a conventional loan meets these standards, it’s eligible to be purchased by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that comprise much of the mortgage market.
• Non-conforming loans: These loans do not meet one or more of the FHFA’s standards. One of the most common types of non-conforming loan is a jumbo loan, a mortgage in an amount that exceeds the conforming loan limit. Non-conforming loans can’t be purchased by the GSEs, so they’re a riskier prospect for lenders.

Pros of conventional loans

• Available from the majority of lenders
• Can be used to finance primary residences, second or vacation homes and investment or rental properties
• Can put down as little as 3% for a conforming, fixed-rate loan

Cons of conventional loans

• Need a credit score of at least 620 to qualify
• Lower debt-to-income (DTI) ratio threshold compared to other types of mortgages
• Need to pay private mortgage insurance (PMI) premiums if putting less than 20% down

Who are conventional loans best for?

If you have a strong credit score and can afford to make a sizable down payment, a conventional mortgage is the best pick.

“Conventional loans are flexible and suitable for a wide range of homebuyers, especially those with good-to-excellent credit scores, stable income, and some savings for a down payment,” says Matt Dunbar, senior vice-president of Southeast Region for Churchill Mortgage. “These loans offer competitive interest rates and flexible terms, making them attractive to buyers who meet the qualification criteria.” Source

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