Advantages of a Conventional Loan

Jun 26, 2023 | Mortgage Guides

Unlocking Benefits: The Key Advantages of Conventional Loans

When it comes to financing a home purchase, there are many options. One popular choice is a conventional loan. Unlike others, they are not backed by the government but are instead issued by private lenders. This article will explore some of the benefits in choosing a conventional loan.

Who Should Get a Conventional Loan?

Conventional loans are fantastic for borrowers with good credit and a down payment of at least 3%. They offer competitive interest rates and flexible terms and are not as restrictive as government-backed loans. Conventional loans are available through banks, credit unions, and mortgage lenders.

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Types of Conventional Loans

There are two conventional loans:

Conforming Loans 

Loans that meet the guidelines set by Fannie Mae and Freddie Mac, which are two government-sponsored enterprises (GSEs). These loans are easier to qualify for and have lower interest rates.

Non-Conforming Loans 

Loans that do not meet the guidelines set by Fannie Mae and Freddie Mac. These are often used to finance larger or more expensive properties or for borrowers with lower credit scores. Non-conforming loans can be more challenging to qualify for and have higher interest rates.

There are also subcategories of conventional loans, including:

  • Fixed-rate loans: These loans have a set interest rate for the loan’s life, making payments predictable.
  • Adjustable-rate loans (ARMs): These loans have an interest rate that can change over time based on an index. ARMs have lower initial interest rates than fixed-rate loans, but the payments could increase.
  • FHA loans: These loans are insured by the Federal Housing Administration (FHA), meaning lenders are more likely to approve borrowers with lower credit scores or higher debt-to-income ratios.
  • VA loans: These loans are guaranteed by the Department of Veterans Affairs (VA), which means they are available to veterans and active-duty military personnel. VA loans do not require a downpayment and have no mortgage insurance premiums.
  • USDA loans: These loans are guaranteed by the United States Department of Agriculture (USDA), which means they are available to borrowers in rural areas. USDA loans have low down payment requirements and no mortgage insurance premiums.

Keeping Control Over Mortgage Insurance 

Mortgage insurance is required for borrowers if they put down less than 20% of the purchase price of a home. The purpose of mortgage insurance is to protect the lender in case the borrower defaults on the loan.

Types of Mortgage Insurance

Private Mortgage Insurance (PMI) 

PMI is required for borrowers who put down less than 20% on a conventional loan. 

Federal Housing Administration (FHA)

This is government-backed mortgage insurance. FHA mortgage insurance is required for all borrowers who purchase a home with an FHA loan.

It should be noted that PMI can be a significant expense, so eliminate it as soon as possible. There are two ways to get rid of PMI:

  • Pay down the loan to 80% of the original price.
  • Refinance the loan to a conventional loan with a down payment of at least 20%.

If you can pay down your loan to 80%, you can request the lender cancel the PMI. The lender will require proof of loan balance, such as a recent statement from a mortgage servicer.

If you cannot pay the loan down to 80%, you may be able to refinance to a conventional loan with a down payment of at least 20%. That can be a good option if you’re looking to lower payments or switch to a different loan, such as a 15-year fixed-rate loan.

Keep in mind that mortgage insurance can be a valuable tool for protecting borrowers and creditors. However, get rid of it as soon as possible to save money on mortgage payments.

Here are some tips for keeping control over mortgage insurance:

  • Understand the types of insurance.
  • Know how to get rid of PMI.
  • Shop around for the best insurance rates.
  • Keep track of the loan balance and ensure you make payments on time.
  • Consider refinancing if you can get a lower interest rate or better terms.

Pros and Cons of a Conventional Loan

Benefits:

  • Competitive interest rates: Conventional loans have lower interest rates than government-backed loans, such as FHA and VA loans. A low-interest rate can save you money on your mortgage.
  • Flexible terms: Conventional loans are available with terms of 15 years or 30 years. This allows you to choose a loan term that fits your budget and financial goals.
  • No government restrictions: Conventional loans are not subject to the same restrictions as government-backed loans. That means you might qualify even if you have less-than-perfect credit or a low down payment.

Disadvantages:

  • Higher interest rates: Conventional loans have higher interest rates than government-backed loans, such as FHA and VA loans. 
  • Down payment requirements: Conventional loans require a down payment of at least 5% of the home’s purchase price. That can be significant.
  • Closing costs: Conventional loans have closing costs, which get paid at the time of closing on the loan. These fees can add thousands of dollars.
  • Private mortgage insurance (PMI): If you put down less than 20% on a conventional loan, you must pay PMI. PMI is an insurance policy that protects the lender if you default on the loan. PMI can add hundreds of dollars to a mortgage.
  • Longer terms: Conventional loans have longer terms than government-backed loans. That means you will make payments for a longer time.

Summary

A conventional loan can be an excellent option for those with good credit and a stable income. With lower interest rates and flexible terms, borrowers can save money and have more control. Plus, with no insurance requirements and the ability to borrow a more considerable amount, a conventional loan can be prudent for those looking to buy a home or refinance their existing mortgage. 

However, compare offers from different lenders to ensure you get the best deal. By weighing the benefits and disadvantages, you can make an informed decision that meets your financial needs and goals. 

To begin the process of applying for a conventional loan or learn more, visit Wesley Mortgage at the link below or call 888-407-2102.

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