A Grasp on Conventional Loans for your Home Purchase
Thinking about different mortgage options that are available out there for you can be overwhelming.
It can take hundreds or even thousands of hours researching the best mortgage option so you can purchase and step into a home that is yours.
Sprint Funding is here to help you navigate through your mortgage woes with its simple and intuitive approach in moving your loans from start to finish.
Our outstanding, certified, and trusted loan officers will assist you throughout the loan process and make sure you will be making the best well-informed decision on your home investment.
When you’re looking to buy a home, you’re guaranteed to encounter a wide range of options to help you get the funding you need.
FHA, VA, USDA loans…
But what about conventional loans?
What Is a Conventional Loan?
At its core, a conventional loan is a loan that’s available and guaranteed through the private sector instead of through the government.
This includes banks, credit unions, and lending agencies.
Despite all the benefits that come with other kinds of government-backed loans, conventional loans make up a huge portion of purchases and refinances.
In the first quarter of 2022, conventional loans accounted for 78.5% of new home sales.
How Do Conventional Loans Work?
In short, conventional loans are pretty straight forward:
The bank/credit union/financial institution purchases property on your behalf and turns the title over to you.
In return, you promise to pay back the lender the amount you owe with interest.
The exact details of your loan will vary depending on a number of factors.
Conventional home loans fall into two different categories: conforming and non-conforming.
Conforming loans meet the guidelines set by the Federal National Mortgage Association (Known as Fannie Mae) and the Federal National Mortgage Association (Known As Freddie Mac).
These are the two government-backed mortgage companies that own a large amount of the mortgages in the US.
For conforming loans, the size of your loan is limited. In 2021, the conforming loan limit for a single-family home was $548,250, with an average fixed interest rate of around 3%. (But both may be higher in certain states and territories.)
Non-confirming loans (also known as Jumbo loans) exceed these limits. Since they present a larger risk to lenders, they tend to come with higher interest rates and stricter requirements.
How Are Conventional Loans Different from Government-Backed Loans?
Choosing between a conventional loan and a government-backed loan depends on your financial circumstances.
Government-backed loans feature some great incentives but aren’t always available to everyone.
Below are the main features of the most common government-insured loans:
- Federal Housing Administration Loan (FHA)
An FHA loan is open to candidates with a credit score as low as 500 as long as you have a 10% down payment or 580 with a 3.5% down payment.
- Veterans Benefits Administration Loan (VA)
A VA loan doesn’t require a down payment or mortgage insurance but is only for select members of the military and/or their spouses.
- U.S. Department of Agriculture Loan (USDA)
USDA loans do not require down payments and can help low-income families purchase a home in an eligible area.
| Conventional Loan | FHA Loan | VA Loan | USDA Loan | |
| Down Payment | 3% minimum (usually 5% for non-first-time buyers) | 3.5% minimum | None required | None required |
| Credit Score | 620 minimum | 580 minimum with 3.5% down 500 minimum with 10% down |
620 minimum (May vary by lender) | No minimum (But usually look for 640+) |
| DTI | 43% maximum | 50% maximum | No maximum – but potential restrictions on borrowers with a DTI ratio greater than 41% | 41% maximum |
| Eligibility | Available to anyone who qualifies | You may qualify even with debt or a low credit score. | Must be military or the spouse of active or deceased military personnel | Available to low-income borrowers only. |
| Fees | Can cancel with 20% equity | Mortgage insurance includes one-time premium upfront plus annual premiums | Must pay VA funding fee ranging from 1.4% to 3.6% | Must pay 1% guarantee fee upfront and annual fees (currently 0.35%) |
| Other Restrictions | Can be used for second or vacation homes and investment or rental properties | The property must be approved by an FHA appraiser. Must be your primary residence. | Can only be used for primary residences | The property must be located in a USDA-approved area |
Despite the benefits offered by the government-backed loans, you may save more money with a conventional loan if you can put more money down or have a strong credit score.
It’s worth noting that although these loans are backed by the government, they are still obtained through the same private lenders that offer conventional loans.
Conventional loans are the most popular mortgage option amongst our customers and the most common type of loan being offered by many mortgage and loan companies like us.
Since securing the right mortgage has never been a walk in the park, what should you know about conventional loans that will help you make a well-informed decision when you plunge right into it?
Conventional Loan Defined
Sprint Funding provides specific scenarios where conventional loan is a best fit.
Our experienced and friendly loan specialists can talk you through the best scenarios for a conventional loan that will give you the ideal benefits if this type of loan is your ultimate choice.
A conventional loan may also be called a conventional mortgage.
It is a home loan that a home buyer can get that is not secured, insured, guaranteed, or backed by the government.
If you are a home buyer and you choose a conventional loan, you are backed by private lenders like banks, credit unions, and mortgage companies.
You can also be guaranteed by Fannie Mae and Freddie Mac, the two enterprises that are sponsored by the government to guarantee most of the mortgages made in the U.S.
It has been reported that because of the popularity of conventional loans due to their wide availability and low rates, 3 in 5 buyers use it when buying a house.
In fact, our self-employed customers benefit most from conventional loans because it requires less requirements, thus, less paperwork.
Current Conventional Loan Rates
As a trusted mortgage company, we at Spring Funding consider conventional loans a popular choice because of their low rates that make buying a home less financially stressful for our customers.
The most popular type of conventional loan, the fixed-rate conventional loan has an average rate of 3% APR (Annual Percentage Rate) for a 30-year loan.
On the other hand, the average rate for a 15-year fixed-rate conventional loan is 2.75% APR.
How are Conventional Loan Rates Determined?
As we value our customers in Sprint Funding, it is important that we let them understand how conventional loan rates are determined based on important factors that are also part of the requirements for securing a conventional loan.
These factors are:
Credit Score. A home buyer with a higher credit score can be offered a lower rate than a buyer with a lower credit score. For example, a buyer can be offered about 0.5% lower rate if he or she has a 740 credit score and a 20% down.-
Mortgage Backed Securities (MBS). Mortgage lenders sell the loans they fund to investors who buy shares in pools of similar mortgages called MBS. They set their rates and monitor MBS prices all day (or pay someone to monitor for them).
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Lenders raise conventional loan rates when MBS prices drop and drop their loan rates when MBS prices rise. The rise and fall of mortgage rates are affected by economic activity and inflation. Uncertainty in the economy is good news for you if you are looking for a mortgage since it can bring down mortgage rates.
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Lock in conventional loan rates. Lowest conventional loan rates are available if you lock in when mortgage rates drop.
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“Perfect” Applicant. Get a personalized rate quote. Conventional loan rates that are published are usually based on “perfect” loan applicants who have a great credit score and a large down payment.
Your personalized conventional loan rate may be lower or higher. A government study showed that loan applicants who ‘shopped around’ to get at least three quotes for their mortgage rate received up to 0.50% lower rates than those who did not.
Sprint Funding offers the best competitive rates for all budget ranges. Learn from our tenured and trusted loan advisors the best rate for your conventional loan.
Types of Conventional Loans
Sprint Funding caters to all types of conventional loans and we can guide you through the type of conventional loan transaction tailored to your needs so you can get the home that you want.
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If your mortgage falls within the Fannie Mae and Freddie Mac’s loan down payment and income requirement, it is referred to as a conforming loan.
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Conforming conventional loans also conform to the dollar limits set annually by the Federal Housing Finance Agency (FHFA). In 2020, a conforming conventional loan must not exceed $510,400.
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You get to pay a lower interest rate with this type of conventional loan. The recent 15-year interest rates for conforming conventional loans are averaging under 4%.
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You will typically be required to get mortgage insurance if your down payment is less than 20% of your conforming conventional loan. This is to protect the lender in case you stop making payments on your loan.
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If your conventional loan exceeds the loan limit, it is considered a non-conforming conventional loan.
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This type of loan which is also called a ‘jumbo loan’ is funded by lenders or private institutions.
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This type of loan is usually for higher-priced homes. A disadvantage of this type of conventional loan is that they require excellent credit history, larger down payments, and higher interest rates.
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If your conventional loan exceeds the loan limit, it is considered a non-conforming conventional loan.
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This type of loan which is also called a ‘jumbo loan’ is funded by lenders or private institutions.
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This type of loan is usually for higher-priced homes. A disadvantage of this type of conventional loan is that they require excellent credit history, larger down payments, and higher interest rates.
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If your mortgage falls within the Fannie Mae and Freddie Mac’s loan down payment and income requirement, it is referred to as a conforming loan.
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Conforming conventional loans also conform to the dollar limits set annually by the Federal Housing Finance Agency (FHFA). In 2020, a conforming conventional loan must not exceed $510,400.
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You get to pay a lower interest rate with this type of conventional loan. The recent 15-year interest rates for conforming conventional loans are averaging under 4%.
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You will typically be required to get mortgage insurance if your down payment is less than 20% of your conforming conventional loan. This is to protect the lender in case you stop making payments on your loan.
Other Types of Conventional Loans
You’ll find a wide variety of conventional home loans everywhere you go as you search for the loan option that’s right for you.
However, here are some of the most common types in addition to the basic conforming and non-conforming options listed earlier.
Adjustable-Rate Loans
Many mortgage loans offer fixed interest rates with the same monthly payment throughout the loan’s lifetime.
An adjustable-rate loan offers an alternative:
You’ll get a fixed interest rate for a set period of time, usually 3-10 years, and after that, your interest rate can adjust each year depending on current market conditions.
Amortized Conventional Loans
Amortized loans are designed to help you gradually repay your loan without a balloon payment. You’ll be advised of fixed payments to make each month to stay on top of interest rates – whether fixed or adjustable.
Portfolio Loans
This type of loan is one that a lender chooses to keep in their own portfolio rather than selling it on the secondary market.
This means the lender can be more flexible than what Fannie Mae and Freddie Mac standards usually allow, such as with credit score and DTI requirements.
Subprime Loans
Conforming loans require a DTI below 50% and a credit score of 620 or higher. However, if your financial circumstances have suffered, and you wish to buy a home, you may qualify for a subprime mortgage loan.
