What is a Conventional Loan and How Does it Work?

Looking to buy a home? You might have heard about conventional loans during your research. These popular mortgage options serve as the backbone of home financing in the United States, and I'm here to help you understand exactly what they are and if one might be right for you.

Conventional Loan: A conventional loan is a type of mortgage that is not backed or insured by a government agency like the FHA or VA. These loans typically require better credit scores and larger down payments than government-backed mortgages, and they follow guidelines set by Fannie Mae and Freddie Mac.

Types of Conventional Loans

Let's break down the two main categories of conventional loans. First, we have conforming loans, which stick to the guidelines set by Fannie Mae and Freddie Mac. These loans have specific limits that change yearly - for 2024, the standard limit sits at $766,550 in most areas.

Non-conforming loans march to their own beat. The most common type? Jumbo loans, which go above those conforming loan limits. Portfolio loans are another variety, where lenders keep the loans on their own books rather than selling them.

Key Requirements for Conventional Loans

Want to qualify for a conventional loan? Here's what you need to know:

• Credit scores typically need to be 620 or higher

• Down payments start at 3% for some programs, but 20% helps you avoid PMI

• Your debt-to-income ratio should stay under 43%

• You'll need steady employment and income documentation

Benefits of Choosing a Conventional Loans

Conventional loans shine in several ways. You can drop PMI once you reach 20% equity - something you can't do with FHA loans. They work for all sorts of properties, from single-family homes to condos. Plus, if you've got your documentation ready, these loans often close faster than government-backed options.

Potential Drawbacks to Consider

Nothing's perfect, right? Conventional loans have their challenges:

• You'll need a higher credit score than with FHA loans

• Saving for a larger down payment takes time

• Past credit issues might make qualifying tougher

• PMI adds to your monthly payment if you put down less than 20%

How Conventional Loans Stack Up Against Other Options

Each loan type serves different needs. FHA loans work well for lower credit scores. VA loans offer amazing benefits for veterans with no down payment required. USDA loans help rural homebuyers. Jumbo loans serve luxury home purchases.

Getting Your Application Ready

Ready to apply? Start by:

• Getting pre-approved to know your budget

• Gathering recent pay stubs and W-2s

• Collecting bank statements

• Preparing tax returns

Clearing Up Common Misconceptions

Many people think you absolutely need 20% down - not true! You can get a conventional loan with much less. Your credit doesn't need to be perfect either. And PMI isn't permanent - you can remove it once you build enough equity.

Smart Steps to Qualify

Start preparing early by:

• Paying bills on time to boost your credit score

• Setting up a dedicated savings plan for your down payment

• Paying down existing debts

• Organizing your financial documents

Current Market Conditions

Interest rates keep shifting, and lending standards adjust with market conditions. Competition for homes remains strong in many areas, making pre-approval more important than ever.

Making Your Choice

Conventional loans make sense if you have good credit and stable income. They're particularly attractive if you can make a 20% down payment or plan to build equity quickly to remove PMI.

Ready to Move Forward?

Bellhaven Real Estate's team knows conventional loans inside and out. We'll connect you with trusted lenders and guide you through finding the perfect home. Stop by our office, and we'll help you take the next step toward homeownership.