Conventional Home Loans: Requirements, How They Work, What’s the Difference and More!

If you are exploring your mortgage financing options, you have likely come across both conventional and FHA loans. Conventional loans are becoming more popular these days, as more and more people are looking for alternatives to FHA loans.

There are many different types of conventional mortgages, but they all follow the same basic guidelines. But what is the difference between these two types of mortgages? And which one is right for you?

In this article, we will take a closer look at conventional home loans and compare them to FHA mortgages. We will discuss the requirements for each type of loan, as well as how they work. Plus, we will provide tips on how to apply for a conventional mortgage loan. So let’s get started!

How Do Conventional Loans Work?

Investors getting pre-approved for conventional home loans

Conventional home loans are mortgages that are not insured or guaranteed by the federal government. This means that if you default on your mortgage, the lender will be able to foreclose on your home and sell it in order to recover their losses. However, conventional mortgages typically have lower interest rates than Federal Housing Administration (FHA) loans, and they may be a better option for borrowers who have a higher credit score.

Conventional loans are typically available with either a fixed interest rate or an adjustable rate. A fixed-rate mortgage has an interest rate that remains constant over the life of the loan. An adjustable-rate mortgage (ARM) has an interest rate that changes periodically, based on market conditions.

Conventional loans work in much the same way as other types of mortgages. The borrower applies for a loan from a lender and provides information about their income, debts, and assets. The lender then reviews this information to determine if the borrower qualifies for the loan.

What Is the Difference Between Conventional Home Loans and FHA?

There are several key differences between FHA and conventional mortgages:

Down payment: FHA loans require a minimum down payment of just
Credit score: You can qualify for an FHA loan with a credit score as low as 500. However, you will need at least a 580 credit score to qualify for a conventional loan.
Mortgage insurance: FHA loans require mortgage insurance, regardless of the size of your down payment. With a conventional loan, you will only be required to pay mortgage insurance if you make a down payment of less than 20%.
Interest rates: FHA loans typically have lower interest rates than conventional loans. However, this is not always the case, and it is important to compare rates from multiple lenders before deciding which loan is right for you.

Conventional mortgage financing means that the borrower can avoid paying for private mortgage insurance (PMI). FHA loans require that all borrowers pay for mortgage insurance, regardless of how much equity they have in their home.

Now that we have looked at some of the key differences between FHA and conventional home loans, let’s take a closer look at the requirements for each type of loan.

What Are the Requirements for a Mortgage Conventional Loan?

There are several requirements you will need to meet in order to qualify for a conventional mortgage loan:

Down payment: As we mentioned before, you will need at least a 20% down payment in order to avoid paying private mortgage insurance (PMI).
Credit score: As we mentioned before, you will need a credit score of at least 580 in order to qualify for a mortgage conventional loan.
Debt-to-income ratio: Your debt-to-income ratio (DTI) must be less than 43%. This means that your monthly debts, including your mortgage payment, must not be more than 43% of your monthly income.
Employment history: You will need to have a steady employment history in order to qualify for a conventional mortgage loan.
Income: You will need to have a steady income in order to qualify for a conventional mortgage loan.

What You Need to Know About Traditional Mortgages

Investor inquiring about conventional home loans

Traditional mortgages are the most common type of home loan. They are typically available with either a fixed or adjustable interest rate, and they come in a variety of terms, from 15-year to 30-year loans.

Now that we have looked at the requirements for a conventional mortgage loan, let’s take a closer look at how you can apply for one.

How You Can Apply for a Conventional Real Estate Loan

The first step in applying for a conventional real estate loan is to contact a lender and get pre-approved. Once you have been pre-approved, your lender will give you a list of documents that you need to provide in order to complete the application process. These documents may include:

Your most recent tax return: This will help your lender determine your income and calculate your DTI.
Your most recent pay stubs: This will help your lender verify your employment history and income.
Bank statements: Your lender will need to see a record of your assets, such as savings accounts, stocks, and bonds.
Pay stubs from the last 30 days: This will help your lender verify your employment history and income.
W-2: This form will provide your lender with information about your financial situation.

Once you have gathered all of the required documents, you will need to fill out a mortgage application. Your lender will then review your application and make a decision on whether or not to approve you for a loan.

After you have gathered all of the required documentation, you will need to fill out a mortgage application. Once your application has been approved, your lender will order a home appraisal. The appraiser will visit the home and assess its value.

If the appraiser determines that the home is worth less than you have agreed to pay for it, you may need to negotiate a lower price with the seller. Once the appraisal has been completed and the loan has been approved, you will be ready to close on your new home!

Conventional Loans and Mortgage Insurance

Conventional loans are a great option for borrowers who have strong credit scores and a down payment of at least 20%. If you are looking for a conventional mortgage loan, be sure to contact a lender and get pre-approved before beginning your home search.

One of the benefits of a conventional loan is that you are not required to pay for mortgage insurance if you have at least 20% equity in your home. However, if you have less than 20% equity, you will be required to pay for Private Mortgage Insurance (PMI).

FHA Loans and Mortgage Insurance

Unlike conventional loans, FHA loans require borrowers to pay for mortgage insurance even if they have more than 20% equity in their home. This insurance protects the lender in case the borrower defaults on the loan.

When it comes to credit scores, FHA loans have more lenient requirements than conventional loans. FHA loans require a minimum credit score of 580, while conventional loans require a minimum credit score of 620.

If you are looking for a loan with more flexible credit requirements, an FHA loan may be the right choice for you.

FHA Loans Required Credit Scores

In order to qualify for an FHA loan, borrowers must have a credit score of at least 580. However, it is important to note that lenders can set their own credit score requirements, and some lenders may require a higher credit score than 580.

If you are interested in applying for an FHA loan, be sure to contact a lender and get pre-approved before beginning your home search.

Now that we have looked at the key differences between FHA and conventional home loans, let’s take a closer look at the requirements for each type of loan.

If you are in the market for a new home, you will need to decide which type of loan is right for you. Be sure to consider all of the factors we have discussed in this blog post before making your decision.

Now that you know more about conventional home loans, it’s time to start shopping for your new home! Contact a local real estate agent today and begin touring homes in your area.

Are you ready to begin the process of buying a home? Start by getting pre-approved for a mortgage loan. You can also visit our website for more helpful tips to get pre-approved.