Conventional Loans: Pros and Cons
written by: Nathan Gillin
When you are buying, building, or refinancing a home and looking at your loan options, you will find a variety of different options. It is important to know these different loan types, which ones you qualify for, and what are the benefits and the downsides to each one.
Conventional Loans can be used for purchasing, building, or refinancing a home.
- Conforming conventional loans must meet Fannie Mae and Freddie Mac guidelines. (Fannie Mae and Freddie Mac are government sponsored enterprises whom purchase mortgages from lenders), and they will almost always have loan limits dependent on the location of the home.
- Nonconforming conventional loans are not purchased by either of these government firms. They do not have limits and are typically purchased by lenders or private groups.
- Fast loan processing
- Low interest rates
- Term lengths on fixed-rate mortgages vary from 10 to 30 years
- PMI (Private Mortgage Insurance) is lower than on average
- Down payment as low as 3% of the home value
- However, no PMI is applied with a 20% down payment
- PMI can be cancelled by lenders once 20% equity is reached
- Harder to qualify
- Riskier for the lender; they are not insured by the government
- Higher credit score is needed (620 credit score needed)
- Lower debt-to-income ratio (max: 49.9%)