Conventional loans, also referred to as conforming loans, are the most sought after home loan option in the US because of their many advantages over the other loan types. It’s no wonder that more than 60% of mortgage loan applicants prefer conventional loans over others. This is mainly due to their flexibility, lower costs and reasonable rates. However, these come with relatively strict credit requirements, so not everyone will qualify for them.
Down Payment Requirements
With conventional loans, a minimum down payment of 3% can suffice, which is even lower than that for FHA loans (3.5%). However, if your mortgage down payment is anywhere less than 20%, you will be required to pay the private mortgage insurance (PMI).
Private Mortgage Insurance (PMI) Requirements
PMI rates vary with the down payment and your credit history. As explained earlier, PMI is payable if your mortgage down payment is less than 20%; however, unlike FHA loans that require PMI to be paid throughout the life of the loan, conventional loans allow you to cancel the PMI once you reach 20% equity in your home. In addition, PMI is a risk-based insurance, so a good credit score will allow you to save more on PMI in conventional loans than in FHA loans.
Credit Score Requirements
But to qualify and gain all the benefits of conventional loans, you ought to have a good credit history. Ideally, you should have a credit score of at least 680. While those below 680 may qualify, the associated costs such as the LLPA will be higher. For example, a credit score of 740 will require a loan fee of 0.25%, while the same loan for someone with a 660 credit score will raise the fee to 2.75%. Getting a different type of loan, such as an FHA loan, becomes more feasible in such a case.
Thus, if you have a promising credit history, go ahead and get a conventional loan.
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