If you are shopping for a cost-effective home loan, you are probably looking for a conventional mortgage. Before making your choice, however, you should understand the best conventional mortgage loans available in 2024, based on your needs and budget.
Conventional mortgage loans are the most prevalent type of home loan. Unlike government loans, they are funded by traditional banks, mortgage lenders, and credit unions. While conventional mortgages may have stricter qualification requirements compared to government loans like an FHA loan, they generally come with the best mortgage rates and lower closing costs.
What Is Conventional Loan?
A conventional loan refers to any mortgage not insured or guaranteed by the government, as seen in programs like the Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs.
Conventional loans may fall into two categories: conforming or non-conforming.
If you are ready to fill out an application, we will match you with mortgage lenders that will provide the best conventional loan rates and terms!
Typically, conventional loans impose stricter eligibility criteria compared to government-backed mortgages, necessitating a higher credit score, a larger down payment, and a lower debt-to-income ratio (DTI) from the borrower.
Nevertheless, conventional mortgages are accessible through a wide array of private mortgage lenders, encompassing banks, credit unions, online lenders, and mortgage brokers.
This facilitates easier comparison shopping for a conventional loan. Some banks have the ability to waive origination fees in an effort to earn your business. While some trusted lending companies, may adopt a more lenient approach for individuals with lower credit scores.
Why Is it Hard to Qualify for a Conventional Mortgage Loan?
As they lack this form of insurance, conventional mortgages typically enforce stricter eligibility criteria. This entails requiring a higher credit score, a lower debt-to-income ratio, and a larger down payment.
Are the Benefits with Getting a Conventional Loan?
Conventional loans frequently emerge as the preferred choice for borrowers boasting robust credit profiles, capable of providing a down payment of at least 3%, or potentially more. Delve into the meaning of “conventional” within the mortgage sector to ascertain if it aligns with your needs for a home loan.
What Is the Downside of a Conventional Mortgage?
Borrowers might additionally be required to cover mortgage insurance premiums if their down payment falls below 20% of the home’s purchase price. Another drawback is that conventional loan rates could be elevated compared to other loan categories for individuals with imperfect credit or minimal funds available for a down payment.
Why Would I Be Declined a Conventional Home Loan?
Most conventional loan programs mandate a consistent two-year record of earnings and employment. Should your paystubs, tax returns, or W-2s indicate income or employer fluctuations, or if you’ve transitioned between careers, an underwriter might hesitate to approve your application for a conventional mortgage. In such instances, verifying funds for your down payment or closing costs becomes challenging.
Can You Add Renovation Costs to a Conventional Loan?
There are options available for both homebuyers and homeowners to incorporate the cost of a home renovation project into their mortgage. These options include FHA 203k Loans and Fannie Mae HomeStyle Loans.
Alternatively, you could reach out to your current mortgage lender to see if they are willing to extend additional funds. This is a very rare option as this would be considered a loan modification or a refinance mortgage. We have never seen a conventional mortgage lender randomly increase your loan amount outside of a modification or refinance.
Renovation loans can be integrated into your monthly mortgage payment and offer funding for projects that enhance your home. Most borrowers choose to use a HELOC or second mortgage loan, but technically it is possible to get funds for renovate and roll it into a mortgage like a construction loan.
Conventional Mortgage Loan Overview
A conventional loan is a mortgage that is not backed by a government entity, such as the FHA or VA. Home buyers who can qualify for a conventional mortgage should strongly consider them because conventional loans usually have fewer costs and lower rates than other options.
Conventional mortgage lenders usually set tougher requirements to qualify for a loan. For instance, if you have a credit score under 620, you probably cannot get a conventional loan. In this case, an FHA loan would probably be better. You also should understand your credit score, DTI ratio, and amount of down payment before deciding between a conventional loan and government-backed loan. We will discuss how to get pre-approved for a mortgage from the best conventional lenders online.
Conforming Conventional Loans
The most common conventional loans are conforming loans. They are the conventional home loans that stick to the guidelines offered by Fannie Mae and Freddie Mac. These are the two mortgages entities devised by the US government to ensure the mortgage market runs as smooth as possible. Conforming loan guidelines in 2024 state that these loans cannot be more than $726,200 in most counties of the US. More expensive counties have higher loan limits, however.
The best borrowers for conforming conventional loans are those with a solid credit score above 660 and meet DTI and income requirements. These loans are also appropriate for those who do not need a loan larger than the conventional limit.
Nonconforming Loans
A nonconforming loan, also known as a portfolio loan, are held by the lender and are not sold on the conventional mortgage market. A nonconforming loan is not going to be owned by another entity, so it doesn’t need to conform to typical conforming loan requirements. This means that the loan provider has more flexibility to establish its own rules for qualifying borrowers.
Nonconforming loans are ideal for people who want more flexibility in the loan. They may want a lower down payment, no private mortgage insurance, or a loan amount that is higher than what conventional loans allow.
Jumbo Loans
A jumbo loan is a type of nonconforming loan that doesn’t adhere to the guidelines set by Fannie Mae and Freddie Mac in that it exceeds the top loan limits. These loans are riskier and borrowers usually have more stringent underwriting requirements. You will probably need a high credit score, low DTI, and a large down payment. But you may not necessarily have a higher rate.
Jumbo mortgage loans should not be confused with high balance loans. A high balance loan may be needed if you need to borrow more than $726,200 and reside in an area that the FHA says is a high-cost region. A high balance loan is a conventional, conforming mortgage. Jumbo loans are best for highly-qualified borrowers with a higher income, credit score, and down payment.
Fixed Rate Mortgage
A fixed-rate mortgage is a popular type of conventional loan with a stable rate that is in effect for the entire life of the loan. This is the most popular type of mortgage because it has a guaranteed interest and principal payment, giving the borrower more financial certainty.
A fixed-rate mortgage is best for people who plan to stay in their home for a long time and want a predictable payment. Shop and compare the best fixe rate mortgages online.
Adjustable Rate Mortgage
An adjustable-rate mortgage usually has a fixed rate for a short period, such as one or three years, and then adjusts to market rates. The initial interest rate may be lower than rates for fixed rate loans. However, you should be financially prepared for a higher rate later. Many loans adjust every six months or year after the fixed-rate period expires.
Borrowers who want a lower initial payment may choose an adjustable-rate loan. Just make sure that you are prepared to pay a higher amount in a few years. However, the rate could also fall; in 2024, there are signs that interest rates may begin to drop. So, if you are okay with more financial risk, you may choose an adjustable-rate mortgage if you think rates will come down.
You also may want an adjustable rate mortgage loan if you plan to sell the home before the fixed-rate period is over.
Low Down Payment Loans
There are some conforming mortgages that do not have 20% down payment requirements. For example, Fannie and Freddie back certain loans that have only a 3% or 5% down payment. These loans could be appropriate for borrowers with limited money down but high credit scores. Some popular options are the Fannie Mae HomeReady mortgage and the Freddie Mac HomeOne and Home Possible loans. Also ask about no down-payment mortgages.
Takeaway on Qualifying for the Best Conventional Mortgages
There are many advantages to conventional mortgages for home buyers:
• Conventional loans have lower down payment requirements than FHA loans -3% vs 3.5%.
• Lower mortgage insurance rates and requirements: You will need to pay PMI if you don’t have a 20% down payment, but it is less expensive than FHA mortgage insurance.
• High loan limits: The loan limit for most conventional loans is higher than for FHA or VA loans.
• Higher DTI allowed: You may be able to have a 45% DTI with a conventional loan, which is higher than an FHA, VA, or USDA loan.
• More flexibility on usage: You can use a home bought with a conventional loan for rental properties without living there. An FHA loan is only for an owner-occupied property.
However, keep in mind that you need to have at least a 620-credit score to qualify for a conventional loan. You will pay a higher rate, too. If you have a low credit score, the FHA program may be a better fit.
BD Nationwide can match you with the best conventional mortgage lenders online so you can receive quotes for highly competitive conventional loans with excellent terms and rates, so contact us today!
