Updated: July 16, 2024
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A conventional mortgage offers the flexibility and competitive rates needed for home financing, making it a popular choice among homebuyers. We’ll explore the essentials of conventional loans, like their benefits and types, to help you make a better-informed home-buying decision.
A conventional loan is sourced from private lenders and is not backed by the government. It offers more flexibility than government-backed mortgages.
A conventional mortgage may have lower interest rates and offer multiple loan options, but it also has higher credit requirements and potential PMI costs.
Conventional loan rates are influenced by credit score, debt-to-income ratio and down payment size, impacting terms and affordability.
Conventional mortgages are offered by private lenders, such as banks, credit unions or mortgage companies. They are not backed by the federal government. The lack of government support allows for more flexibility in terms of interest rates and down payments.
These loans come in various durations — typically 15, 20 or 30 years. You can choose between a fixed-rate mortgage, which keeps the interest rate stable, and an adjustable-rate mortgage, where rates may change after a set period depending on market conditions.
Conventional mortgages come in two categories, each tailored to meet different financial needs and situations.
Type of Conventional Loan | Definition | Ideal for Home Buyers Who… |
|---|---|---|
Conforming Loans | Loans that conform to the maximum loan limits set by Fannie Mae and Freddie Mac, usually offering lower interest rates. | Are purchasing a property within conventional financing limits and prefer standardized loan terms. |
Non-Conforming Loans | Loans that exceed the borrowing limits, known as jumbo loans, typically used for financing luxury properties or homes in highly competitive markets. | Are looking to purchase high-priced properties well above typical financing limits. |
Understanding the types of conventional loans can help you maximize your opportunities depending on how much home you need to purchase.
As of July 2024, the national average APR for a 30-year fixed-rate mortgage is 6.90%, while a 15-year fixed-rate mortgage APR averages 6.27%. Conventional loan rates are influenced by several factors, including your credit score, debt-to-income ratio and the size of your down payment.
Use our rate table to see the rates you can get for the various conventional loans available in your state:
| 5-year ARM | APR7.77% |
| 7-year ARM | APR7.71% |
| 10-year Fixed | APR5.85% |
| 15-year Fixed | APR6.04% |
| 20-year Fixed | APR6.57% |
| 30-year Fixed | APR6.92% |
The interest rate on a loan is the cost you pay each year to borrow money, expressed as a percentage of the loan amount. For example, according to July Zillow data, the interest rate for a 30-year fixed-rate conforming loan is currently 6.83%.
The annual percentage rate (APR) includes the interest rate plus other costs associated with the loan, such as fees or additional costs. It represents the actual cost of borrowing money. For instance, the same 30-year loan has an APR of 6.90%.
A 7-year adjustable-rate mortgage (ARM) has an average interest rate of 6.71% and an average APR of 7.52%. The difference between interest rate and APR can be significant, so it’s essential to understand both when shopping for a mortgage.
Conventional mortgages offer several advantages, such as competitive interest rates and diverse term options. However, they also come with risks like stricter credit requirements. Explore these pros and cons using the table below:
Pros | Cons |
|---|---|
More Mortgage Options: You can choose from fixed-rate, adjustable-rate and jumbo loans, tailoring your mortgage to your financial profile. | Higher Credit Score Requirements: These loan types typically require a higher credit score than other types, possibly leading to higher rates or disqualification with a lower score. |
More Financing and Property Types: Allow financing for a broader range of properties, including second homes and investment properties. | Closing Costs: Appraisals, origination fees, title costs and escrow fees can range from 2% to 5% of the loan amount, adding significantly to purchasing expenses. |
Cancellation of Private Mortgage Insurance: With a 20% down payment, you can avoid PMI, reducing overall loan costs. Alternatively, you can request PMI cancellation once your LTV reaches 20%, or it will be automatically removed when it reaches 22%. | Higher Down Payment Requirement: It's common to put down 10% to 20% if you're not a first-time homebuyer, though you can put down as little as 5% for a conventional mortgage. First-time buyers can qualify for a down payment as low as 3%. VA and USDA loans don't require a down payment. |
Higher Loan Limits: Conventional loans have a higher limit of $766,550 in most areas, which can increase to $1,149,825 in high-cost areas. |
Conventional home loans offer benefits like lower interest rates and flexibility in the property types they can be used for, but they're not suitable for everyone. We'll explore three scenarios to help you understand when a conventional loan might be the right — or wrong — choice for your financial situation.
Mia is a professional in her late 30s with a stable job and an impressive credit score above 700. Over the years, she has saved up to have more than 20% for a down payment, eyeing a modest home in the heart of a bustling city. Her financial diligence positions her uniquely among potential homebuyers.
For Mia, a conventional loan is an excellent choice. Her substantial down payment frees her from needing private mortgage insurance (PMI), reducing her overall borrowing costs. With her strong credit, Mia will likely benefit from lower interest rate opportunities, making a conventional loan feasible and financially advantageous. It also offers the flexibility to use the property as an investment in the future, perfectly aligning with her long-term financial strategies.
Jack is a recent college graduate in his early 20s who has just started his career journey. Eager to transition from renting to owning, he faces the typical challenges of a young adult: managing student loan debt and building a credit history. Jack has about 5% saved for a down payment.
A conventional loan might not be the best path for Jack at this time. His higher debt-to-income ratio due to student loans and short credit history could make it challenging to secure favorable terms. Without a 20% down payment, Jack would be required to pay for PMI, increasing his monthly expenses. An FHA loan might be a more suitable option for him, with lower down payment requirements and more lenient credit criteria.
Patricia, a 65-year-old retiree, is contemplating downsizing now that she's retired. She has lived in her home for the past 35 years, and while the equity in her home is substantial, her monthly income, derived mainly from her retirement fund and Social Security benefits, is limited. She's looking for a smaller, more manageable property that suits her quieter lifestyle and reduced income.
A conventional loan may not suit Patricia's financial circumstances. Monthly mortgage payments could strain her limited income, and a conventional loan's stricter requirements can pose additional hurdles to obtaining financing. Given her situation, exploring a reverse mortgage might be more advantageous. It would allow Patricia to convert part of her home equity into cash without the burden of monthly payments, better suiting her income structure and lifestyle needs in retirement.
Applying for a conventional loan can be straightforward if you know the steps involved. We’ll guide you through the necessary actions, from initial preparation to final approval.
Before even approaching a lender, closely examine your financial situation. Scrutinize your credit score, debt-to-income ratio and current financial commitments. Knowing these numbers upfront gives you a better understanding of what loan terms you may qualify for and helps you set realistic expectations.
Don't settle for the first lender that crosses your path. Each one might offer slightly different interest rates and terms. Shop around to find the one that fits your needs best.
A pre-approval letter can put you in a strong negotiating position. It shows sellers that a lender has already assessed your financial credentials and is willing to back your home purchase.
After you've zeroed in on the home you want to buy, you'll need to formally apply for a mortgage. This entails submitting financial documents such as W-2s, tax returns and recent bank statements.
Your lender will request a home appraisal to determine if the property you're buying is a good investment. They'll want to make sure the home's value justifies the loan amount.
Finally, your lender will finalize the loan terms and prepare a closing disclosure. It lays out the specifics of your mortgage, including the final terms and costs. After signing it, you’ll get the keys to your new home.
Securing a conventional loan isn't an overnight process, but knowing the steps helps you stay ahead of the game, optimizing your time and potentially even saving money.
Here, we provide you with deeper insights about conventional mortgages. Whether you're a first-time homebuyer or considering a refinance, these answers can help you make better choices as you shop for a loan.
Down payment assistance programs are available for conventional loans. These are often offered by state or local housing authorities and can help reduce upfront costs for eligible buyers.
Mortgage insurance on a conventional loan is required until you achieve at least 20% equity in your home. You can request to cancel the private mortgage insurance (PMI) at this point, or it will be automatically removed once you reach 22% equity.
Assuming a conventional mortgage is possible, but it depends on the specific terms of the loan. Some lenders may allow a loan assumption, but it typically requires the new borrower's credit approval.
You can apply for a conventional loan with a co-signer. Having a co-signer with a strong credit history can improve your chances of approval and potentially secure better loan terms.
You can refinance your conventional mortgage at any time. However, it's best to consider when you can secure a lower interest rate or better terms than your current mortgage. Be mindful of closing costs and other fees that may impact your savings.
Rolling closing costs into a conventional mortgage is possible, but this typically increases the loan amount and may result in higher monthly payments. Lenders may also assess your loan-to-value ratio to determine eligibility.
About Zachary Romeo
Zachary Romeo is the Head of Loans and Banking at MoneyGeek, with over 10 years of experience and forthcoming certification as a Commercial Banking and Credit Analyst (CBCA). Previously, he led production teams for some of the largest online informational resources in higher education.
Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt through people-first content.
