What is a Conventional Loan?
A conventional loan is simply a mortgage that is not insured or backed up in any way by a government agency such as the Federal Housing Administration or the FHA. Unlike government-backed loans, the terms and conditions in a conventional loan are defined by the lenders than government agencies.
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What are the Benefits of a Conventional Loan?
It is true that conventional loans do not suit everybody. For some, taking out a government-backed loan might prove to be a better choice than taking out a conventional loan. Despite the differences, there are some advantages to taking a conventional loan.
- Conventional Loans Involve Fewer Hurdles as Compared to an FHA Loan
To become eligible to receive an FHA loan, your home should meet certain standards set by the FHA and also should pass an appraisal by an FHA agent. Often, there are situations in which an approval does not come through from the FHA in the last minute. This proves to be difficult for both the seller and the buyer. This is why most home sellers prefer buyers who have taken out a conventional loan.
There is a guarantee that the purchase will go through without any issues and it is very straight-forward in its terms and conditions. - Flexibility in Loan Amounts
A government-backed loan such as an FHA loan caps at a certain limit whereas a conventional loan you have greater flexibility with loan amounts when it comes to conventional loans. - There are no Restrictions on Banks
FHA loans are offered through a very limited number of banks. On the other hand, most banks operate with conventional loans. Also, conventional loans allow banks the liberty of setting their own terms and conditions and also to bend them to their discretion. - Mortgage Insurance is not Required
As long as you can make a down payment of 20 percent, a conventional loan does not require that you take mortgage insurance. In addition, conventional loans are the better choice when it comes to buying a home which has some considerable repairs to be done. In such cases, an FHA loan will not approve the loan until all repairs are completed.
What are the Eligibility Requirements for a Conventional Loan?
- A Valid Identification
One of the first things you need to be eligible for a conventional loan is a valid identity proof such as a Social Security number. You can also use your passport or driving license. - Employment and Salary History
You should have a stable employment history to be considered for the loan. In most cases, the lenders require that you have been with your current employer for at least 2 years. - A low Debt-to-Income Ratio
Your debt-to-income ratio, or in other words your total debts divided by your income should be low. In most cases, lenders consider applicants with a debt-to-income ratio of 50 percent. - A Good Credit Score
A good credit score shows your reliability when it comes to paying off your loans, so of course, a lender will consider applicants who have a reasonably good credit score.
If you would like any more information about conventional loans, don’t hesitate to contact us.