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A conventional mortgage is a mortgage in which the underlying terms and conditions meet the criteria set out by Fannie Mae and Freddie Mac. Approximately half of all mortgages issued are conventional mortgages. Or, to put it another way, Fannie Mae and Freddie Mac guarantee and/or purchase about half of all mortgages.
- Down payments: Conventional loans can be had with a down payment amount as low as 3% if you’re a first-time homebuyer.
- Credit rating: Homebuyers must have an acceptable credit score to be considered for this type of financing. Typically scores above 630 are considered to be “good,” and anything below that is “poor.” The lower your score is, the higher your interest rate will likely be. You must also have a debt-to-income ratio of less than 50%.
- Closing costs: Conventional loans usually require borrowers to pay fees when they close on a home, but these fees are typically less than those paid by FHA and VA buyers. Conventional loans do not require that the borrowers pay for inspections, appraisals or credit reports.
It has several attractive features that make it a great choice for many people, especially first-time homebuyers who have good credit, some funds saved for a down payment, and are at low risk of defaulting.
These features include:
- Low-interest rates: One key advantage of a conventional loan is the low-interest rate. Interest rates on these loans are often lower than those of other types of loans, such as government-backed loans.
- Fast loan processing: Conventional loans tend to have shorter processing times than other loans. This can be beneficial if you are looking to purchase a property quickly.
- Diverse down payment options: Another key advantage is that there are several down payment options available with a conventional loan. You can choose to put down as little as 3% of the purchase price or up to 20% in some cases. This can make it easier to qualify for a loan if you do not have a lot of cash available for a down payment.
- Low private mortgage insurance (PMI) rates: The PMI rates on conventional loans are often lower than those of other loan types.
- Lenient credit standards