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Conventional Home Loans

Conventional Loans: The Cornerstone of U.S. Home Financing

For many homebuyers, the Conventional Loan serves as the gold standard—the most common and flexible mortgage option available. Unlike government-backed products like FHA, VA, or USDA loans, a conventional loan is originated and guaranteed by a private lender, such as a bank, credit union, or mortgage company, though they often adhere to guidelines set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.

As your mortgage lending professional at The Herd Lending, I view conventional financing as a powerful tool for well-qualified buyers seeking maximum flexibility and long-term savings. This comprehensive guide will break down the conventional loan, covering everything from qualification standards and down payment options to the key benefits that make it the ideal choice for millions of homeowners nationwide.

What is a Conventional Loan?

Simply put, a Conventional Loan is any mortgage that is not insured or guaranteed by a U.S. government agency. These loans are defined by their adherence to specific criteria, most notably those related to loan size and borrower profile:

  • Conforming Loans: The vast majority of conventional loans are conforming, meaning they meet the loan size limits set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac. In most of the U.S., the 2024 limit for a single-unit property is $806,500, though higher limits apply in designated high-cost areas.
  • Non-Conforming (Jumbo) Loans: A conventional loan that exceeds the conforming limit is known as a Jumbo Loan.

The conventional loan’s stringent requirements often lead to more favorable terms for borrowers, making it a top choice for those with solid credit and a stable financial history.

How do I Qualify for a Conventional Loan?

Successfully securing a conventional loan hinges on two core financial components: your creditworthiness and your ability to repay the debt.

Credit Score Requirements

The credit score is arguably the most critical factor for conventional loan eligibility and pricing.

  • Minimum Score: Most lenders require a minimum credit score of 620 or higher for a conventional loan.
  • Optimal Score: Borrowers with credit scores of 680 or higher (and especially 700+) are most likely to receive the lowest interest rates and best terms, dramatically reducing the lifetime cost of the loan. A higher score can also help compensate for other factors, such as a higher Debt-to-Income (DTI) ratio.

Debt-to-Income (DTI) Ratio

The Debt-to-Income (DTI) ratio measures your total monthly debt payments against your gross (pre-tax) monthly income. Lenders use it to assess your capacity to handle a new mortgage payment. The Herd Lending recommends a DTI of 50%.

Down Payment & Mortgage Insurance: Answering Key Questions

How Much Down Payment for a Conventional Loan?

One of the greatest misconceptions about conventional loans is that they always require a 20% down payment. While 20% is ideal, conventional loans offer significant flexibility:

  • Minimum Down Payment: Conventional loans can require as little as 3% down for a fixed-rate conforming loan, making them competitive with FHA loans. First-time buyers are often eligible for these 3% down programs, like the Conventional 97 or HomeReady loans, provided they meet other requirements, including a minimum 620 credit score and DTI of 50% or less.
  • Other Requirements: A 5% down payment is also a common minimum for certain scenarios, such as adjustable-rate mortgages (ARMs) or for non-first-time buyers. Second homes typically require a minimum of 10% down.

Do Conventional Loans Require PMI?

The answer is yes, but only if your down payment is less than 20%.

  • The Requirement: When you make a down payment of less than 20% on a conventional loan, you are required to pay for Private Mortgage Insurance (PMI). PMI protects the lender, not the borrower, against financial loss if the borrower defaults on the mortgage.
  • The Advantage (Cancellability): The key advantage of PMI over other forms of mortgage insurance is that PMI is cancellable. You can request that your lender cancel PMI once your loan balance is paid down to 80% of the home’s original appraised value or purchase price. By law, lenders must automatically terminate PMI once your loan balance drops to 78%. This ability to eliminate mortgage insurance is a major financial advantage over government loans, which often require mortgage insurance for the entire loan term.

Key Benefits and Features

For borrowers who meet the credit and DTI requirements, a conventional loan offers superior benefits that lead to long-term savings and greater financial control:

  1. Lower Overall Cost: While FHA loans often have lower initial interest rates, the ability to cancel PMI once you reach 20% equity usually makes the conventional loan the less expensive option over the life of the mortgage.
  2. Flexible Property Types: Conventional financing can be used for a wide range of property types, including a primary residence, second homes (vacation homes), and investment properties.
  3. Faster Processing: Conventional loans often involve a more streamlined and quicker underwriting process because the lender deals directly with private capital and doesn’t depend on government-mandated approvals or exhaustive government inspections.
  4. Flexible Terms: Conventional loans offer the widest selection of loan products, including 30-year fixed, 15-year fixed, and various adjustable-rate mortgages (ARMs), allowing for greater customization of your payment schedule and financial strategy.
  5. No Loan Limit Ceiling: While most conventional loans conform to FHFA limits, the availability of Jumbo Loans ensures that high-value properties can be financed, offering maximum purchase power.

Are Conventional Loans Assumable?

Generally, no. Unlike some government-backed loans (most VA and FHA mortgages), conventional loans are typically not assumable.

  • An assumable loan allows a buyer to take over the seller’s existing mortgage and its terms (interest rate, remaining balance, and repayment period).
  • Conventional loans typically contain a “due-on-sale” clause, which requires the seller to pay off the mortgage entirely upon the sale of the property. This prevents the mortgage and its existing interest rate from being transferred or “assumed” by the new buyer.

Your Conventional Loan Partner

At The Herd Lending, we specialize in guiding our clients through the nuances of conventional financing. We understand that maximizing your financial power begins with securing the most advantageous loan terms possible. If you have a solid credit history, a manageable DTI, and are looking for a flexible, cost-effective, and versatile mortgage product, a conventional loan is likely your best path to homeownership.

Ready to see the competitive rates and custom terms a conventional loan can offer you? Contact The Herd Lending to get pre-approved today.

Contact The Herd Lending Today!

Are you ready to take advantage of the benefits of a conventional loan? Reach out to The Herd Lending today, and let us help you navigate the path to homeownership. Our team is here to assist you in finding the perfect loan solution that meets your unique needs and sets you up for success. Call us at (904) 406-7753 or fill out our online contact form to get started. Experience the professionalism, expertise, and personal touch that our team brings to the table. We look forward to serving you!
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