Should You Get a Conventional Loan? An Expert Weighs In

Conventional loans are some of the first loans many people may think of when it comes to mortgages. Not only are they one of the oldest forms of the “modern mortgage” still around today, but they also come in a few different repayment options that make them an appealing option for many borrowers. 

But, just like shoes, personal finance isn’t one-size-fits-all, and conventional loans aren’t always the best option for borrowers. Here’s what you need to know about conventional loans, plus how to tell if acquiring one is right for you. 

Conventional loans are the most common loans in the mortgage industry, according to senior loan officer (NMLS #2021279) Ray “Skip” Velasquez of Premier Home Loans. “They account for over 80 percent of all home mortgages and are not required to be insured or backed by any agency because of their stricter approval guidelines,” he says. Additionally, conventional loans typically have the best available pricing in both fees and interest rates. 

Conventional loans at a glance:

• Account for 80 percent of all home mortgages
• Strict approval guidelines
• Not required to be insured or backed by agencies
• Typically offer the best pricing for fees and interest rates

With stricter approval guidelines for a conventional loan, banks and investors will want to see specific things before they’ll give a borrower the green light. Velasquez says that includes:

• A good credit score (620 or higher)
• Debt-to-income ratio below 45 percent
• For refinances, a loan to value (LTV) at 80 percent
• In the case of a purchase, a 20 percent down payment 

“The key is to keep a good credit history, maintain good record keeping, and always pay your bills on time,” says Velasquez. “Even someone who has never had a mortgage before but has at least a 12-month provable rent history can qualify for a conventional loan.”

When it comes to conventional loans, there are two main types: conforming and non-conforming (or jumbo loans). 

• Conforming loans: Backed by government entities Fannie Mae and Freddie Mac, which include restrictions on things like maximum loan sizes. 
• Non-conforming loans: Not backed by the government and are best suited to borrowers who are looking to borrow $647,200 or more or who live in an area that the Federal Housing Finance Agency (FHFA) has flagged as “high cost.” 

While Velasquez says there are multiple loan programs out there, he normally suggests borrowers check to see if they qualify for a conventional loan before attempting other avenues because there are certain perks like:

• No mortgage insurance like borrowers may find with FHA loans
• The ability to finance a variety of property types
• Program options
• No limit to how much you can borrow
• More options when it comes to adjustable rate mortgages vs. fixed rate mortgages

There are also some downsides:

• You need to have a 20 percent down payment
• Credit score requirements are more stringent
• It can be hard for commissioned or self-employed borrowers to qualify

Sometimes a borrower will qualify for another loan type, like a VA loan which is backed by the U.S. Department of Veteran Affairs, but would rather purchase their home or refinance using a conventional loan. “In most cases, the VA loan wins the day as the payments are slightly lower but the fee structure can be considerably higher,” Velasquez says. “There are also people who are self-employed who will struggle to get conventional financing in many cases but there are several routes to go.” 

The Bottom Line: While conventional loans are super popular, Velasquez believes they aren’t the only path. “First-time homebuyers, veterans, self-employed persons, retirees, and the vast majority of borrowers can be accommodated with some sort of loan and it just takes a bit of legwork on our behalf and a bit more documentation from the borrower,” he says. And while they should be the “goal” for every borrower, they are by no means the end all be all when it comes to home financing.