On your journey to becoming a homeowner, you’re likely to come across different types of mortgage products that you can apply for, chief among which is the conventional mortgage loan

In this article, we will discuss what makes up a conventional loan and explore how it compares to other options. 

How Does a Conventional Mortgage Loan Work? 

The key feature to remember about a conventional mortgage is that it’s not backed by the government. They are issued by private lenders such as a financial institution, online lenders like Ratecloud, or a credit union, instead of the government or government agencies. 

Government agencies, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs, or the Small Business Administration (SBA), for that matter, do not guarantee a conventional mortgage loan. 

Conventional mortgages are further broken down into one of two buckets: conforming or non-conforming

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Just because the loan isn’t guaranteed by the government doesn’t mean that a government agency such as Fannie Mae or Freddie Mac doesn’t want to hold it in their portfolio. 

If it’s conforming, this means that the loan can be sold down the line to Fannie Mae or Freddie Mac. By offloading the loan, lenders access greater amounts of capital to deliver mortgages to more borrowers. 

These government sponsors place a ceiling on the loan amounts for single-family homes, which for 2021 was $548,250 across the continental U.S. 

While conforming loans are up to snuff to meet Fannie Mae or Freddie Mac’s size standards, non-conforming mortgages, such as risky jumbo loans, are not. 

Conventional Loan Features

Before you decide on whether a conventional mortgage is a way to go, it helps to understand what makes it tick. 

Here are some of the key features of a conventional loan:

  • Flexibility: A conventional mortgage could be 15, 20, or 30 years in length, though a 30-year term is the most popular. If flexibility is what you’re after, a conventional mortgage could do the trick. 
  • High standards: Without government backing, lenders are inheriting more risk in the event of a default. So, if you’ve got a shiny credit score and can afford to put down a sizable down payment of 3% or more, a conventional loan could be for you.
  • Fees: While you won’t escape fees altogether, a conventional mortgage leapfrogs some of the costs of other mortgage products, such as an upfront premium on an FHA loan, for example. 

Conventional Loan vs. FHA 

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Conventional loans are often compared to FHA mortgages. Whether you are buying a new home or refinancing the one you’ve got, you could find yourself having to decide between these two options. 

Both conventional or FHA or conventional loans tend to have 15–30 year terms attached. But that’s pretty much where the similarities end. 

Unlike a conventional loan, an FHA mortgage is backed by a government agency — the Federal Housing Administration, to be exact — and boasts more relaxed requirements for the borrower. 

That’s because the FHA guarantees these loans with insurance, shouldering some of the risks for qualifying lenders on its approved list. And if you can’t decide between a conventional loan or an FHA, your risk profile might decide for you. 

Risk Profile 

If you are in the low to middle-income bracket, an FHA could be your best bet. Borrowers could qualify for an FHA loan with a lower credit score vs. a conventional loan. 

To qualify for an FHA loan and get the lowest interest rate possible, a borrower should have a minimum FICO score of 580. In exchange, they can qualify for a 3.5% down payment. 

Borrowers with a FICO score below that level might still qualify for a loan but can expect to put down a higher down payment of 10%.  

To qualify for a conventional mortgage, borrowers should expect to have a credit score of 620 or higher, whether it’s a 30 or 15-year mortgage. 

If you’d like to take advantage of the lower costs, a better rate, and faster turnaround times that an online lender like Ratecloud has to offer, the standard is higher. You’ll need a credit score of 680 on the purchase side and 620 for refinancing, as the lender is taking on more risk in this case. 

Your debt-to-income (DTI) ratio also matters. The lower it is, the greater the chance that you will qualify for a conventional mortgage. To qualify, you should also have a minimum DTI in the 45-50% range. If your DTI could use some work, an FHA loan might be the better option. 

As with an FHA loan, the higher the down payment, the better for a conventional mortgage. 

If the borrower can scrape together at least 20% of the purchase price for the down payment, they won’t need to purchase private mortgage insurance to protect the lender against the chances of a default. 

Otherwise, the insurance price is spread across the monthly mortgage payments, which you can use Ratecloud’s calculator to find. 

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Conventional Loan vs. Other Options 

In addition to an FHA loan, you might also want to compare a conventional loan to other mortgage loan products, such as VA or USDA loans.  

  • VA Loan: As the name suggests, a VA loan is backed by the Department of Veterans Affairs. To qualify, borrowers must either be active members of the military or a veteran. One of the key benefits of a VA loan is the 0% down payment for qualifying homes. 
  • USDA loan: These loans are backed by the U.S. Department of Agriculture and are geared toward rural Americans. The USDA has some mortgage loan products that are designed for low-income households. 

Get Started With RateCloud’s Mortgage Products 

Knowledge is power, and now that you’ve gotten up to speed on conventional loans vs. other mortgage products, you are one step closer to either buying a home or refinancing. 

Whether it’s a 15, 20, or 30-year mortgage you’re seeking, RateCloud makes it simple to take that next step with all the perks a digital mortgage has to offer, even if you’re just dipping your toes in the homeownership or refi waters. 

Get started on your digital mortgage application today!