Conventional Loans

A Conventional Loan is the only type of loan that isn't backed or insured by the government (such as FHA, VA and USDA loans). For this reason, Conventional loans offer a higher degree of risk to the lender and thus are typically a better fit for people with higher credit scores and/or people who wish to put down a larger down payment. However, you are still able to put down as little as 1% on a conventional loan. If a buyer puts down 20% or more, they are able to get rid of monthly mortgage insurance. With less than a 20% down payment on a conventional loan, buyers would have mortgage insurance added to their monthly payment until they hit about 80% equity in their home. For instance, if you put down 5% on a $100,000 home you would have monthly mortgage insurance until you pay your mortgage down to about $80,000. 

The advantage that Conventional loans offer is that the mortgage insurance is not permanent (as they are with USDA and FHA loans). So even if a borrower does not have a down payment of 20% on day one, they still have the goal of getting rid of their monthly mortgage insurance at some point down the road. Whereas, with an FHA or USDA loan the mortgage insurance will never go away unless the loan is paid in full or refinanced. With a conventional loan, the mortgage insurance rate is determined by a borrower's credit score and down payment percentage. For instance, a $100,000 loan to a borrower with 5% down and a 720 credit score would have mortgage insurance of approximately 0.62% or $51.67 per month. With the same scenario but a 660 credit score, the mortgage insurance would be 1.15% or $95.83 per month. With a 720 credit score and 10% down, the mortgage insurance rate would be 0.44%. With a 660 credit score and 10% down, the mortgage insurance rate would be 0.71%. As you can see, your credit and down payment can make a big difference on a conventional loan. 

It is typically thought that the more you put down, the better the interest rate will be. While it certainly can help if you put more money down, you won't see huge jumps on the interest rate with more money down. For instance a person who puts 5% down and 20% down will typically get an interest rate that is very similar. The biggest reason the down payment matters is it affects the mortgage insurance (as you can see in the previous paragraph). 

To summarize: Conventional Loans are a great options for people with higher credit scores and/or a larger down payment. Conventional loans do not have permanent mortgage insurance as FHA and USDA loans do. Conventional loans are the toughest out of all the loans as it applies to credit and debt to income ratio. The minimum credit score for Conventional Loans is 620, although those with lower credit scores may qualify for Conventional loans they may be better suited to do a government loan such as FHA. 


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