Buying a home can be a confusing process, even when you’ve done it before. There are so many different mortgage options, and the one you choose will lock you into specific terms for the duration of your loan.
Choosing the right option is crucial, and for many, the right move is a conventional mortgage. They’re flexible, predictable, and widely accessible when you have solid credit and stable income. But choosing a conventional mortgage requires more than just comparing interest rates. You need a clear picture of your current financial situation now, and that needs to match what lenders are looking for.
What defines a conventional mortgage?
Conventional mortgages aren’t insured by a government agency, which gives lenders the ability to customize terms. However, it also requires buyers to meet stronger financial standards. Everything depends on the size of the loan and the borrower’s financial profile. Borrowers who want predictability, flexible down payment options, and long-term cost control usually benefit from a conventional mortgage.
A simple way to know if this structure is right for you is to compare current rate options and eligibility rules between mortgage lenders. For example, Home Connect’s conventional mortgage guide explains how reviewing rate structures, PMI requirements, and amortization options can help you determine if a conventional loan aligns with your financial strategy. The ability to compare these variables rather than being given a one-size-fits-all program is a major advantage.
Points to consider:
- Credit score requirements are the foundation. Conventional lenders usually expect higher credit scores – often 620 or above – to qualify. A higher score unlocks lower rates and better terms.
- Down payment flexibility without strings. Not all conventional mortgages require a 20% down payment. Sometimes first-time buyers can qualify for as low as 3% down, but it comes with an increase in PMI costs. Still, the flexibility is appealing since not everyone has the same financial situation.
- Compare total lifetime costs. The interest rate of your loan matters, but don’t forget to assess PMI, fees, closing costs, and rate adjustments. When comparing FHA loans with conventional loans, conventional PMI usually drops off once you hit 20% equity. However, FHA insurance usually stays for the duration of the loan. This difference can save tens of thousands of dollars over the lifetime of the loan.
Ultimately, conventional mortgages can be customized, and if you don’t currently qualify, it might be worth waiting a while and fixing your credit so you can qualify.
Who benefits from a conventional mortgage?
You’re most likely to benefit from a conventional mortgage if:
- You have strong credit. A higher score means lower interest rates. Just a 0.5% rate difference on a $400,000 loan can cost or save you more than $40,000 in interest over 30 years.
- You want to avoid permanent mortgage insurance. Unlike government-backed FHA loans that require you to carry mortgage insurance for the full term if your down payment is less than 10%, conventional PMI disappears once you achieve 20% equity. NerdWallet estimates FHA borrowers pay between $100-$300 extra per month because of PMI.
- You prefer more loan structure options. You can get fixed-rate terms of 15, 20, or 30 years with a conventional mortgage, along with the option of an adjustable-rate mortgage (ARM). If you know you’re going to sell or refinance in five years, an ARM might give you a lower rate initially, which is something you can’t get from an FHA.
Consider the down payment strategies
Nothing impacts the total cost of your mortgage like the size of your down payment. How much you put down influences just about every aspect of your loan, including your rate, PMI, lender flexibility, and lifetime cost. While other options let you pay less up front, paying more down with a conventional mortgage will provide better savings in the long run.
Larger down payments reduce monthly obligations and PMI timelines. Since interest is calculated based on principal, even a small increase in your down payment can dramatically reduce the total interest you owe. For instance, a 10% down payment on a $500,000 home reduces your financed balance by $50,000. That amounts to saving hundreds of dollars every month.
Consider your debt-to-income ratio
With a conventional mortgage, you’re more likely to get approved with a lower debt-to-income (DTI) ratio. Lenders often cap DTI at around 43% to make sure borrowers are better able to maintain long-term payments.
Choose the structure that best serves your future
A conventional mortgage isn’t always the best choice for everyone, but it does give financially prepared borrowers the most control long-term. If your credit is strong, you’ve got your debt under control, and you have a solid down payment strategy, a conventional mortgage is probably a good choice. Just make sure to do enough research and explore all of your options before signing on that dotted line.
0 Comments