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This article was reviewed by Doug Noll, a member of the Finder Editorial Review Board and award-winning lawyer, mediator and author with over 40 years of experience in the legal field.
Conventional loans are one of the fastest and most popular ways to purchase a home. But you’ll need to meet strict lending criteria, and you may need to purchase private mortgage insurance if your down payment is less than 20%.
A conventional mortgage loan is any conforming or nonconforming loan that isn’t secured by the federal government.
Available in both fixed- and adjustable-rate terms, conventional home loans are offered by private lenders like banks, mortgage companies and credit unions,.
Conforming loans meet the funding criteria of Fannie Mae and Freddie Mac and fall below the Federal Housing Finance Agency’s (FHFA) annual dollar limit. As of 2020, this limit is set at $510,400 in most states, but it can be higher in high-demand metropolitan housing markets such as Alaska, Hawaii, Guam and the US Virgin Islands.
Nonconforming loans, often in the form of jumbo loans, offer loan amounts higher than the FHFA limit. They help you access more money to purchase an expensive home. But they’re riskier for lenders and have higher interest rates than conforming loans. To qualify, borrowers typically need a credit score of 700 or higher and should be prepared with a down payment of at least 20%.
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While other factors may affect someone applying for a conventional loan, the overall process generally follows these steps:
When determining your mortgage rate, lenders are interested in more than just your credit score. Here are a few other factors your lender consider:
You might qualify for a conventional loan with a credit score as low as 620, but requirements may vary depending on the lender you choose.
Generally speaking, the higher your credit score, the better your mortgage rate. The best rates are reserved for borrowers with FICO scores above 740.
Costs of taking out a conventional loan include:
Conventional loans offer both fixed- and adjustable-rate terms to help you finance the purchase of your home. But they also have stricter lending criteria than government-backed loans. Find out more about mortgages and if a conventional loan is for you.
This insurance is typically added to your monthly mortgage payment as a premium. You can usually cancel your PMI once you’ve accumulated at least 20% equity in your home.
Shannon Terrell is a writer for Finder who studied communications and English literature at the University of Toronto. On any given day, you can find her researching everything from equine financing and business loans to student debt refinancing and how to start a trust. She loves hot coffee, the smell of fresh books and discovering new ways to save her pennies.
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