What Is a Conventional Loan?
A conventional loan is a type of conforming mortgage loan that is not backed or guaranteed by the federal government. Conforming loans must meet Fannie Mae and Freddie Mac requirements — two government-sponsored entities that purchase mortgage loans from lenders and sell them on the secondary mortgage market.
The purpose of Fannie Mae and Freddie Mac is to “provide liquidity, stability, and affordability to the mortgage market,” according to the Federal Housing Finance Agency. One way they do this is by freeing up capital for lenders so they can process more loans and help more borrowers become homeowners.
Conventional loans tend to have stricter criteria than government-backed loans like FHA, VA, and USDA loans.
With conventional loans, Griffin Funding sets the loan terms and works with our borrowers directly. In this situation, Griffin Funding has determined the borrower’s ability to make their payments on time and won’t default on the loan.
Government-backed loans, on the other hand, have terms set by the federal government ensuring or guaranteeing the loan, protecting the lender in the event the borrower defaults on the mortgage.
Who Is a Conventional Loan Best Suited for?
They are most popular with borrowers that have good credit, who can afford a down payment, a stable job, and consistent income, and people who are overall financially stable.
Government-backed loans like the VA, FHA, USDA, and other loan programs are designed more for borrowers who can’t afford a significant down payment, have less-than-perfect credit, are first-time homebuyers, and may need some type of financial assistance.
Conventional Loan Requirements
With any home loan, you’ll need to prove your ability to repay your mortgage. Conventional home loans come with stricter requirements than some other types of home loans.
Conventional loan requirements vary by lender, but you’ll typically need the following to qualify:
- Down payment: Conventional loans for first-time buyers require a down payment of at least 3% to qualify. However, most lenders recommend making a down payment of 20% to avoid private mortgage insurance (PMI) that can increase your monthly mortgage payments.
- Private mortgage insurance (PMI): If you put down less than 20% on the loan, you’ll be required to pay PMI. Private mortgage insurance is designed to protect investors if the borrower defaults on the loan. How much you pay each month in PMI will largely depend on the size of your down payment, but having a higher credit score can also reduce your total cost.
- Minimum credit score: Conventional home loans require a credit score of at least 620 to qualify. The higher your credit score, the lower your interest rate will likely be, so it’s generally recommended to increase your score as much as possible before applying for a home loan.
- Debt-to-income (DTI) ratio: Your DTI ratio calculates the percentage of your gross monthly income that goes toward paying debts like credit card bills, student loans, other mortgages, and so forth. Most lenders like to see a DTI of less than 43%.
Is It Difficult to Get Approved for a Conventional Loan?
For some borrowers, getting approved for a conventional loan can be more challenging than another type of loan. For instance, while you can get a loan without a job, conventional loan lenders typically like to see that you have a stable, reliable source of income.
In general, these loans can be more difficult to qualify for because they have more stringent lending requirements that include higher down payments, strict income verification methods, and the requirement of PMI.
Conventional Home Loan Advantages
Conventional home loans are available for both new purchases and refinancing. They can be harder to qualify for because of additional credit and financial requirements. However, generally, they offer more flexible terms and fewer restrictions than government-backed loans. Some advantages of conventional loans from Griffin Funding include:
- They are much simpler to apply and qualify for, with less paperwork, and fewer rules and regulations.
- You have more options to choose from and terms are more flexible and customizable, making to it easier to tailor to your specific financial situation and goals.
- They can be utilized for a variety of property types, from single-family, multi-family, condominiums, and even manufactured homes.
- If you have at least 20% down payment, or at least 20% equity when refinancing, you aren’t required to pay mortgage insurance.
- Conventional loan rates are oftentimes a lot lower since the borrower is financially stable and has good credit.
Types of Conventional Loans from Griffin Funding
There are two types of conventional loans: fixed-rate and adjustable–rate mortgages.
- Fixed-rate mortgages have an interest rate that does not change for the life of the loan. The most common terms are 15- and 30-year. They offer more stable and predictable payments that won’t change. Monthly payments are usually very low and spread out over time. They’re a perfect long-term loan if you plan on staying in your house for seven or more years.
- Adjustable rate mortgages (ARMs) have an interest rate that does change. There is an initial upfront period which the rate is fixed for usually one year. During this period, interest rates and monthly payments are usually lower than a fixed-rate mortgage. However, after the initial period, your rate can change or adjust, higher or lower, depending on market conditions. ARM’s are ideal for borrowers who plan on only staying in their home 3-, 5-, 7- or 10-years before the interest rate adjusts according to the mortgage terms.
Special Conventional Loan Programs from Griffin Funding
- HomeOne: HomeOne is a new low down payment conventional loan program designed for all first–time home buyers — no matter where you live or how much they earn.
- No income limits
- No county restrictions
- Down payment as low as 3%
- Gift funds accepted from family members
- Available on conventional fixed-rate loans up to the county loan limit. Make homeownership a reality with Freddie Mac’s HomeOne.
- HomeReady: HomeReady has similar features to HomeOne except with certain income limits.
- Home Possible: Home Possible has the similar features to HomeOne except with certain income limits based on area.
Contact your Griffin Funding loan advisor to discuss which program is best for you.
How to Apply for a Conventional Mortgage
Applying for a loan with Griffin Funding is easy. We offer a streamlined process and, in most cases, can close on your loan within 30 days.
Here’s what you can expect when you apply with Griffin Funding:
- Discovery: We prefer to have an in-person or virtual meeting with all of our potential borrowers to learn more about them and help them learn about our loan programs to find the best option for them.
- Pre-approval: If you decide to move forward with applying for a conventional loan, the first step is getting pre-approved. Pre-approval doesn’t guarantee your loan or loan amount, but it can give you a starting point and competitive advantage when shopping for homes.
- Find your dream home: After pre-approval, you can start looking for your dream home with a realtor. Once you find a home you want to purchase, you can put in an offer.
- Loan application: After putting in your offer on a home, you’ll need to apply for financing. Our loan application can be completed over the phone or online to ensure accuracy. We’ll need some documentation, like the purchase agreement and proof of an earnest money deposit. At this point, we’ll send you a checklist of all the documentation we’ll need you to send us.
- Underwriting: During the underwriting process, we’ll determine whether you qualify for the loan and the loan amount. We may ask for additional documentation to help us get a more accurate picture of your financial situation.
- Appraisal & pest inspection: We’ll order the appraisal to help us understand how much the house is worth so you overpay for a property. You’re responsible for ordering your own inspection, which can help ensure the property doesn’t have major issues.
- Loan approval: Once we obtain approval, we’ll reach out about scheduling a time for final document signing with your loan specialist.
- Funding: Once the loan documents are signed, you’ll receive funding to purchase your home.
Secure a Conventional Home Loan
A conventional home loan might be right for you if you have a good credit history, can afford a down payment, and want to take advantage of lower interest rates.
Unfortunately, these loans are the right option for everyone, which is why you need an experienced lender who can help you find the right loan based on your unique financial situation.
At Griffin Funding, you can expect transparency and open communication, a knowledgeable team of industry experts and a customer-centric team working together to make your home–buying experience effortless and exciting. We are fast and efficient, closing most of our purchase loans in 30 days or less.
Griffin Funding will offer the right loan tailored to you (VA, FHA, Conv, Jumbo, investment property loans, Non-QM, and much more). Contact us for more information on your mortgage loan needs.
Conventional Loan FAQs
How are conventional loans different from FHA loans?
The biggest difference between FHA loans and conventional loans is that FHA loans are guaranteed by the Federal Housing Administration and come with less stringent lending requirements. However, they do require mortgage insurance called a mortgage insurance premium (MIP).
MIP is similar to PMI, but it’s required when you put down less than 10% on an FHA loan. In addition, unlike a conventional loan, you’ll pay MIP for the entire life of the FHA loan. Once you reach 20% equity in your home, you no longer pay PMI with a conventional loan.
How are conventional loans different from non-conforming loans?
As we touched on earlier, conventional loans are conforming loans because they “conform” to the lending guidelines set by Fannie Mae and Freddie Mac to be sold on the secondary mortgage market.
Government-backed loans are also conforming loans like FHA loans and USDA loans are all partially guaranteed by the government, making them lower-risk loans for lenders and borrowers.
Conversely, loans are non-conforming when they don’t meet these requirements. For instance, jumbo loans are non-conforming loans because they allow borrowers to receive financing that exceeds loan limits in their counties.
If you’re comparing conventional vs. jumbo loans, jumbo loans are a lot like conventional loans, but they’re non-conforming because they don’t “conform” to the Fannie Mae and Freddie Mac guidelines, allowing borrowers to increase their loan amounts to exceed loan limits to purchase a higher-cost home.
Conventional loans may be the best option for things like investment properties because there are fewer strings attached. For instance, with government-backed loans, you must live in the residence full-time. However, with conventional loans, you don’t have to live on the property.
That said, certain lenders offer competitive loan programs that cater to investors who are self-employed, which can offer a distinct advantage over conforming loan options.
Can you refinance with a conventional home loan?
You can refinance with a conventional home loan to get better terms or tap into your home’s equity. There are several ways to refinance your mortgages; two of the most popular and easy are cash-out refinancing or streamline refinancing.
A cash-out refinance allows you to tap into your home’s existing equity by securing a loan that’s a higher amount than you owe on your mortgage. The difference between these amounts is the equity or cash you can take out of your home and use for anything, such as consolidating debt, investing, or paying for large purchases.
A streamline refinance allows you to change the terms of your conventional loan. Most people refinance their loans when interest rates are low to reduce their monthly mortgage payments, but you can also change your loan terms — how long you have to repay the loan.
In addition, you can refinance another type of loan into a conventional loan. For instance, if you have an FHA loan, you might refinance to a conventional loan to eliminate mortgage insurance premiums and reduce your monthly mortgage payments.