A conventional mortgage is a type of home loan provided by private lenders, such as banks, credit unions, or mortgage companies. Unlike loans backed by the government, such as FHA or VA loans, conventional mortgages typically require a higher credit score to qualify.
Although conventional loans are not issued or insured by the government, some are guaranteed by two government sponsored enterprises: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These organizations work with private lenders to make home loans more accessible for borrowers.
Transparancy
A loan that meets Freddie Mac and Fannie Mae’s guidelines is known as a conforming loan—it adheres to established rules and regulations. Since the Dodd-Frank Act was implemented, features like negative amortization, balloon payments, and prepayment penalties have been banned on Fannie Mae and Freddie Mac loans. This means conventional loans provide borrowers with a level of safety and transparency, ensuring you won’t be taken advantage of.
On the other hand, alternative loans—such as portfolio loans, Alt-A, and Non-QM loans—operate outside these guidelines. These loans are less regulated, and some may carry risky features that could impact both borrowers and lenders.
That’s not to say all alternative loans are bad; some can be excellent options depending on your situation. However, the details often come with fine print for a reason. If you’re not an experienced borrower or don’t have complete trust in your mortgage professional, a conventional loan is typically the safer and more reliable choice for most people.
Good Credit = Lower Rates
Conventional loans offer competitive interest rates, often rewarding borrowers with higher credit scores by providing lower rates. This makes it worthwhile to check your credit score and review your credit history before deciding to buy a home.
If your credit score is on the lower side, you’ll have time to work on improving it. A higher score could lead to a better interest rate, potentially saving you a significant amount of money over the life of your loan.
Remove MI
With a conventional loan, you can buy a home with as little as 3% down. However, this option does require mortgage insurance, which increases your monthly costs. The good news is that, unlike government loans such as FHA loans, mortgage insurance on a conventional loan doesn’t last for the life of the loan.
Once you’ve built enough equity in your home to reach an 80% loan-to-value (LTV) ratio based on the original purchase price or appraised value, the mortgage insurance can be removed.
Custom Loan Term Options
Borrowers looking to pay off their home faster and save significantly on interest can choose shorter-term loans, such as 15 or 20 year options. Some lenders even offer unconventional terms, like 10, 17, 22, 25, or 27 years for repaying a conventional mortgage. While these loans come with higher monthly payments, they can save borrowers tens, or even hundreds of thousands of dollars in interest over the life of the loan.
Property Flexibility
Conventional loans offer flexibility and can be used for various types of purchases, including second homes, vacation properties, rental properties, multi-unit dwellings, and more. In contrast, VA, USDA, and FHA loans have stricter guidelines, as these programs require the property to be used exclusively as a primary residence.
Competitive Advantage
Conventional loans are often more appealing to sellers, especially in a competitive market where they can choose from multiple offers. These loans typically involve fewer requirements and less paperwork, making the process faster and more reliable from the seller's perspective.
Government loans, such as FHA or VA loans, sometimes come with additional steps or stricter appraisal requirements that can delay or complicate the transaction. While most deals go smoothly, stories about FHA or VA creating issues can make some sellers wary. As a result, many sellers are more likely to favor a conventional loan offer over a government-backed one.
Hidden Fees
Government loans often include a funding fee that is added to the loan amount (though VA funding fees can be waived for those with service-related disabilities). Since these upfront fees are financed into the loan, they can be easy to overlook, but they represent a significant cost that you’ll pay for each month. Conventional loans, on the other hand, avoid these upfront fees, making them more economical overall.
To qualify for a conventional home loan, you typically need to meet the following requirements:
