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Are you looking to buy a home, condo, or another form of real estate? Conventional loans can be a great place to start for the right type of borrower.

Whether going to a local lender or opting for an online mortgage lending company, homebuyers of all backgrounds can find the best conventional loan options and purchase the home of their dreams. In this article, we break down conventional loans and how to qualify for one. Keep reading to learn more.

What Is a Conventional Loan?

Conventional loans are mortgage loans that are not insured or issued by a government agency, such as the Federal Housing Administration (FHA). Instead, conventional loans can be issued by privately operated banks, credit unions, or other financial entities. While government-backed loans may come with special benefits for the borrowers, conventional loans remain the most popular loan among homeowners. These loans are used to purchase houses, condominiums, property, or other forms of real estate.

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Conventional Loan Types

There are several different types of conventional loans. Working with a lender will help you find the best-suited loan for you. Some of these loan types include:

Jumbo Loans

This type of loan is for individuals who want to exceed their loan lending limit to purchase a more expensive property. Jumbo loans require a higher credit score, a larger down payment, and a lower debt and income ratio.

Amortized Conventional Loans

These types of loans help borrowers avoid the balloon payment towards the end of the loan term. By paying fixed monthly payments, borrowers can avoid being blindsided by one large last payment. These loans can a fixed or adjustable interest rate.

Subprime Loans

These loans are great for those with a lower credit score and a debt-to-income ratio of 50%. If you can’t qualify for conforming loans, subprime loans are a good option to consider.

Adjustable-Rate Loans

In contrast to fixed-rate loans, adjustable-rate loans fluctuate based on the current market index rates. This can end up being cheaper or more expensive than a fixed-rate loan.

How Does a Conventional Loan Work?

To understand conventional loans, you will need a basic understanding of what a mortgage is. Because most people do not have enough money to buy a house upfront, they will borrow money from a bank or other financial institution. To borrow a loan, the borrower must put down a minimum amount of money that goes towards the total cost of the home. This is the down payment.

Then, through a series of monthly payments, the borrower must pay off the remaining balance. This is known as the principle. The borrower must also pay off the interest that has accrued during the life of the loan.

The conventional loan is broken down into the loan amount, term, and interest rate, which will vary from borrower to borrower. 

Loan Amount

The conventional loan limit is $647,200 in most states but rises up to $970,800 in high-cost areas. This amount is subject to change as the housing market price change. In fact, in 2022, the loan limit increased by nearly $100,000 to combat the average cost of homes.

Loan Terms

Terms are usually 30 years, but lenders approve some borrowers for a 15- or 20-year loan term. A good credit score and generous income can help you get a shorter loan term, and as a result, a lower interest amount.

Interest Rates

Interest rates vary based on the type of loan, as fixed-rate and adjustable-rate loans are available options. However, interest rates will also be dependent on how good your credit score and history are.

Here’s How to Get a Conventional Loan

To get a conventional loan, you will have to meet certain requirements that ensure the issuing party that you are a reliable borrower. Be sure that you shop around and consider different lenders in order to make sure you get the best possible deal.

Have a Good Credit Score

As a borrower, you need to have a minimum credit score of at least 620. However, for the best interest rate and loan term, you will need a credit score of 700 or higher. Some lenders will require that your credit score is around the 700 mark, so you may have to shop around for the right lender if your score is lower than 660.

Pay a Down Payment

Conventional loans will require you to pay a down payment toward the cost of the house or property. This can be as low as 3% of the loan amount, however, if your down payment is less than 20%, you will most likely be required to purchase private mortgage insurance.

Maintain an Acceptable Debt-to-Income Ratio

In addition to making sure you have the minimum credit score, lenders will also review your debt-to-income ratio. To an eligible borrower, your monthly payments cannot exceed more than 36% of your monthly income. In some cases, the debt-to-income ratio can be expanded to a maximum of 50%.

What Are the Benefits of Conventional Loans?

Conventional loans are arguably more flexible for some borrowers with regard to loan limit, interest rate, and loan term than some government-insured loans. If you have a good credit score, you can qualify for lower interest rates, which will lower the overall cost of your loan. You can also qualify for more expensive homes, as conventional loans can expand your loan limit.

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Find a Loan That Best Suits Your Needs

Now that you know everything there is to know about conventional loans, it is time to research lenders and loan types to find what best fits your needs. Conventional loans are a great option for borrowers who have a good credit score, can pay a sizable down payment, and have a debt-to-income ratio of around 36% or less. Conventional loans are a great choice if you are looking to purchase a home, condominium, property, or another form of real estate.

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