Shopping for a home loan is like shopping for an expensive item, such as a car. To find the best one, you must look at several types and compare them. As you search for a home loan, you might come across a lender offering a conventional loan. If you are unfamiliar with conventional loans, it might be helpful to learn a few things about them. Here are three facts to learn about conventional loans before pursuing one.
1. It Is Not Secured by the Government
When you compare the popular home loan types, you will find that most of them have government backing. Government backing means that the loans are secured by the government. If the borrower fails to pay the loan, the government pays the lender for them, thus reducing the lender's risk. A conventional loan does not have this backing. Instead, private companies issue the loans. As a result, it is typically harder for a person to qualify for a conventional loan than other types.
2. They Have Stricter Eligibility Requirements
The second fact to know is that these loans have stricter eligibility requirements. One reason for this is that they are not backed by a government entity. Therefore, if a borrower defaults, the bank could lose money on the deal. If you want to qualify for a conventional loan, your lender will likely have strict credit score requirements. You might need a score higher than 620 to apply, but some lenders require higher scores. Next, lenders view debt-to-income ratios of applicants. Lenders have strict rules with these, too. Lenders also go through income verification procedures and many other steps before approving and issuing these loan types.
3. You Might Pay Private Mortgage Insurance
Lenders prefer issuing conventional loans to people who can put at least 20% down on their home purchases. The good news is that you can still get a conventional loan without putting 20% down. The bad news is that the lender will require paying private mortgage insurance (PMI). PMI is insurance that you pay to protect the lender. If you fail to pay your mortgage, the PMI you pay for will cover the losses that the lender experiences if they foreclose on your property. PMI increases your monthly payments, but it is not something you can avoid unless you put more money down.
Are you interested in getting a conventional loan? If so, talk to a local home loan lender to find out if you qualify.