Mortgage 101

Conventional Loan: Explained

By Courtney Christensen on July, 22 2020
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Courtney Christensen

Buying a new home is one of the most exciting times of our lives: swiping through photos online, touring homes, picking out paint swatches, and packing up box after box. Through all of it, your real estate agent is at your side, and when the time comes, so is your loan officer. 

Deciding on your new house is the hard part – choosing a loan to go with it is, thankfully, much easier.

What is a Conventional Loan and Why Should You Consider It?

A conventional loan is different than many of the other loan options you’ll come across. Unlike loans like FHA, VA, or USDA, a conventional loan is not government-backed. This means that you can only get a conventional loan through a private lender like a bank or mortgage company like Ruoff Mortgage. It’s also the most popular type of loan considering it is designed for the majority of buyers. It has the least amount of limitations and requirements which means it also has the least amount of paperwork and can be processed much faster.

Some borrowers choose government loans due to low down payment and credit score requirements, but you may be surprised to learn that the requirements for a conventional loan are flexible, too. For instance, while the typical down payment for a conventional loan is 20% of the home’s purchase price, you will likely be able to set aside a smaller amount up front. Additionally, your credit score does not have to be perfect. In fact, a score of 620 or higher may be just fine. Of course, you will need to discuss the conditions with your loan officer to be sure that these are applicable to your unique situation.

Why Should You Choose a Conventional Loan?

Are you looking to close on your home and move in faster? Are you worried about a bidding war? Would you like to have instant equity in your home? Do you want to fill out less paperwork? Are you looking to avoid private mortgage insurance? A conventional mortgage may be your answer!

Faster Closing

When you apply for a mortgage, your application goes through a process called underwriting. During this process, you must submit various forms, IDs, and other informative documents in order for the underwriters to assess any risk associated with lending you a mortgage loan. These documents include income information, driver’s licenses, bank statements, and credit history (among others). With a conventional mortgage, the requirements for a loan approval are less and therefore, the underwriting portion of your mortgage process will go much quicker. In fact, Ruoff is proud to say that our entire mortgage process can be completed in just under 3 weeks instead of twice that with other lenders.

Seller Preference

If you do find yourself in a bidding war, which is becoming more and more common these days as the housing market skyrockets, having a pre-approval and the expectation of a conventional loan under your belt is very attractive to sellers. This is because of the faster closing and lower requirements. Sellers must adhere to requirements for government-backed loans as well. For example, chipping paint on an exterior wall could be grounds for disapproval by an FHA loan whereas with a conventional loan, you’d be allowed to fix this up yourself after you purchase the home.

Instant Equity

Equity comes from paying on the principal of your mortgage loan. The longer you own your home, the more equity you will have as you begin to pay down the loan. To get instant equity in your home, you provide a down payment (which is not always required in some government loans). Whether you put down 3.5% or 20%, it is applied to your mortgage principal and is added to your equity right away.

This is beneficial should you choose to refinance your home later. With our housing market currently seeing record low after record low on interest rates, a refinance may become attractive sooner than you think. Plus, it means you’ll get that much more cash-in-pocket when you decide to sell your home.

No Private Mortgage Insurance

Private mortgage insurance, or PMI, is applied to most loans – but they are particularly important on government loans. PMI is required to protect the lending institutions from too much risk when lending to borrowers, and is often impossible to remove from government loans.

Conversely, a conventional mortgage usually only requires PMI on loans with less than a 20% down payment. Therefore, if you bring a large down payment to the closing table, you can avoid it altogether. However, be assured that if you can only afford a small down payment, the PMI will be removed at a later date once you meet the principal payment requirements. Typically, this can only happen for government loans if they are refinanced into a conventional loan at a later date.

A conventional loan is perfect for homebuyers who have decent credit and can bring a decent amount of money to the closing table for a down payment. While these loans can have more upfront costs than government loans, they more than make up for it in the long run.