Conventional Mortgage Loans

The requirements to qualify for a conventional mortgage loan vary by lender, but generally depend on a buyer’s monthly income and credit history. They also require a bigger down payment, which results in smaller monthly payments. Down payments can be as small as five percent based on the lender’s preference and borrower’s credit history, but most conventional loans require 20% of the home’s cost. Borrowers whose down payment is less than 20% will need to pay for private mortgage insurance. PMI is required on the mortgage until the loan-to-value ratio reaches 80%.

Conventional mortgages are ideal for people with good or excellent credit. Loan terms require a credit score of 740 or higher to qualify for the best available interest rates.

Because conventional mortgages aren’t guaranteed by the federal government, they tend to be considered a greater risk for lenders. But they typically require less hurdles for borrowers compared to FHA and VA loans. This makes them ideal for those who want to buy a new home and are able to meet the income and credit requirements.

The requirements to qualify for a conventional mortgage loan are stricter than an FHA loan and vary by lender, but generally the decision is based on the borrower’s monthly income, credit score and debt-to-income ratio.

Conventional mortgages are ideal for people with good or excellent credit. For the best rates, borrowers typically need a credit score of 740 or higher and a debt-to-income ratio of 45-50% or lower.

Conventional mortgage loans also require a bigger down payment, which can result in smaller monthly payments. Down payments can be as small as 3-5% based on the lender’s preference and borrower’s credit history, but most conventional loans require 20% of the home’s cost. Borrowers whose down payment is less than 20% will need to pay for private mortgage insurance. PMI is required on the mortgage until the loan-to-value ratio reaches 80%.

The main difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is the interest rate. The interest rate with a fixed-rate loan is set from the beginning and remains the same over the life of the loan while the interest rate on an ARM can go up or down during the loan term.

Fixed-rate mortgages

While the interest rate remains the same for fixed-rate mortgages, the amount of interest and principal differs from payment to payment, but the total monthly payment stays the same. At the beginning of the loan, most of the payment goes to interest. With each payment, more and more of the monthly payment goes to the principal. One drawback to this mortgage type is that when interest rates are high, it’s more difficult to qualify for a loan because monthly payments are more expensive.

Adjustable-rate mortgages

ARMs are more appealing to some homebuyers because they start with an interest rate that is below the current market rate. This lower rate will only stay in place during a fixed time interval. After that inaugural period, the interest rate will fluctuate based on the ARM rules, which may result in a spike in the overall monthly payment. Additionally, the adjusted rate may even climb higher than the average rate for fixed-rate mortgage loans. Whichever loan option a buyer chooses, it’s important to weigh the pros and cons of a fixed-rate and adjustable-rate mortgage before closing on a home.

Pros

• Generally offers lower costs than other loan types
• Typically requires less paperwork and are processed quicker than government- issued loans
• Equity builds faster due to the higher down payment
• Smaller monthly payments
• Loan limits up to $766,550, may be higher depending on the county limits

Cons

• Higher down payments, usually 20%
• If a 20% down payment can’t be made, the borrower will need to purchase private mortgage insurance
• For the best rates, the borrower typically needs a credit score of 740 or higher and a debt-to-income ratio of 45-50% or lower.