Conventional Loans: A Popular Choice for Homebuyers
A conventional mortgage loan is provided by private lenders. Unlike government loans like a Federal Housing Administration (FHA) loan, USDA loan, or VA loan, government agencies do not guarantee these loans.
Instead, mortgage lenders can package conventional mortgages and sell them to Fannie Mae and Freddie Mac, the two government-sponsored enterprises that offer liquidity through the secondary mortgage market.
Conventional loans are a popular option for high—and moderate-income borrowers because they are easily available, offer higher loan limits than FHA or USDA loans, and have competitive mortgage rates. In fact, the majority of LGBTQ+ borrowers use conventional loans thanks to their flexibility and good rates.
Conventional Loan Requirements
Conventional loan requirements are stricter than those for government-backed mortgages, but they are still manageable for most borrowers. Our loan officers will help ensure that your application is in the best shape possible so that you have a seamless approval process, with particular attention to these main factors.
Minimum Credit Score
Most conventional loans require a credit score of at least 620, though some lenders may ask for more than this. The lender will also run a credit report to ensure that you haven’t had any recent bankruptcies or foreclosures that present a risk.
If you have a great credit history, you’ll gain access to a better interest rate than someone with a lower credit score, so it’s important that you check your report for any discrepancies and work on repaying any other debts you may have.
This may be slightly harder for LGBTQ+ and BIPOC individuals, who are statistically more likely to have low credit scores: for example, LGBTQ+ adults are twice as likely to have poor credit than their peers. Black Americans have an average score of just 627 compared to the 727 of white Americans.
Doubly disenfranchised people, like LGBTQ+ individuals of color, are significantly more likely to have poor credit than their white LGBTQ+ peers.
If a conventional loan is your dream, though, don’t let statistics stop you: our team will find products that match your credit score.
Down Payment Options
Conventional loans typically require a down payment of 10% or more. However, some lenders may provide a 97% LTV conventional loan to well-qualified borrowers, meaning that you can put down only 3% on your loan.
The higher your down payment, the better your interest rate and the lower your monthly payment. Additionally, if you provide a 20% down payment, you won’t need to pay private mortgage insurance throughout the life of your loan.
We understand that it can be challenging to get a down payment together, especially for marginalized borrowers. BIPOC households have more debt, and LGBTQ+ borrowers are 37% more likely to have student debt, all of which can make it hard to save money for a down payment.
Pride Lending is here to assist in reducing this inequality. We’ll help match you to assistance programs at the local, state, and national levels that will provide loans or grants to make up the difference. This includes some programs made specifically for BIPOC borrowers.
Debt-To-Income (DTI) Ratio Considerations
In addition to your credit score, your mortgage lender will use information about your debts to determine your debt-to-income ratio. This identifies how much of your monthly income will pay off other debts, like auto loans, student loans, credit cards, and medical debt.
Most conventional loan lenders utilize the 28/36 rule to determine whether you have an acceptable debt-to-income ratio. This means that no more than 36% of your income is going to paying off debts, and only 28% is going toward housing expenses like a mortgage payment.
Some lenders will allow you to have a debt-to-income ratio of up to 43%, but they may expect a higher down payment and a better credit score.
Types of Acceptable Income Documentation
Conventional loans require significant income documentation, which includes at least two months of bank statements, tax returns, pay stubs, a list of your debts, and employment history. The focus on tax returns and pay stubs can make it difficult for self-employed borrowers to access this type of home loan.
If this is true for you, our loan officers can assist you in finding alternative home loan options, including bank statement loans, that better suit your needs.
Choosing the Right Conventional Loan
Borrowers can access a variety of conventional loan types, each with its own benefits and uses. We’ll guide you toward the best conventional loans for your specific borrowing situation, whether that is jumbo loans for a supersized home or adjustable-rate mortgages for those who don’t intend to stay in their homes for the long term.
Prequalification vs. Preapproval
Conventional mortgages can be separated into two types: conforming loans and non-conforming loans, also known as jumbo loans.
A conforming loan adheres to the standards set by the Federal Housing Finance Agency (FHFA), called loan limits. These types of loans can be bought by Fannie Mae and Freddie Mac and then sold on the secondary mortgage market.
Non-conforming loans cannot be sold on the secondary mortgage market as they are above these limits; these are called jumbo loans and are typically only provided to the most well-qualified borrowers.
Loan Limits and Eligibility Requirements
Conforming conventional loans adhere to the loan limits set by the Federal Housing Finance Agency, which in 2024 ranged from $766,550 to $1,149,825 for a single-family residence.
Every year, the FHFA sets county-by-county limits for conforming mortgages based on average income, property values, and the cost of new construction in the area.
Jumbo mortgages typically have much higher eligibility requirements because they are riskier for the mortgage lender since they can’t be sold on the secondary market. As such, you can expect to need a credit score of 700 or above and provide a larger down payment, often up to 20%. You may also have to have more than one appraisal.
If you want to purchase a home greater than the conforming limit but don’t want to take out a jumbo mortgage, you can make up the difference by providing a larger down payment.
Fannie Mae and Freddie Mac Guidelines
These two entities offer various home loan programs, including low down payment, refinance, renovation, and manufactured home options. They will purchase mortgages for primary, secondary, and investment properties and refinances for all of these options.
Although both Freddie Mac and Fannie Mae are government-sponsored enterprises, they have slightly different underwriting guidelines. Typically, Freddie Mac is stricter in its guidelines for conventional loans than Fannie Mae.
Fannie Mae will accept credit scores as low as 620, while Freddie Mac requires a 660 credit score or higher to purchase a mortgage.
Both entities will underwrite manufactured homes, but Fannie Mae requires at least a 3% down payment on this home type, and Freddie Mac requires a 5% down payment or more.
Preapproval
Preapproval is an initial confirmation by the lender that you may be eligible for a specific loan sum based on your creditworthiness. To undergo approval, you’ll provide financial documentation like tax returns, bank statements, employment history, and basic identification details. With Pride Lending, you can do all of this online! Once you are preapproved, we’ll send the letter over to your realtor so you can start shopping.
House Hunting
Working with a realtor, you’ll find the property of your dreams in your given area. Be sure to ask about school districts, homeowners’ associations, and any potential restrictions on how you can use your property. You can always get in touch with us if you have any questions, including whether the home is in your budget according to your preapproval.
Submitting an Offer
After you have found a home you love, you’ll need to submit a bid on it. Your realtor can help you write an offer letter based on your budget and the home’s qualities, and we’ll be here to support you should you have any questions.
Mortgage Application
A mortgage application asks for many of the things required from the preapproval process, including financial details, but it will also request information about the property, including its address. This will then be used to investigate the property and ensure it meets the lender’s standards.
Offer Acceptance and Sales Contract
If the seller accepts your offer, you can write up a sales contract, typically conditional on whether the inspection comes back clear.
Home Inspection
A home inspection will uncover any issues with the home, such as foundation cracks, a leaking roof, radon infiltration, or lead paint. The inspector will also ensure that all the home’s primary systems, like the electricity and plumbing, are in good shape and don’t pose issues for residents.
Depending on the severity of the issues, negotiation may be required between you and the seller to decide whether the deal can go through. Your lender may not approve a loan if the property has serious problems.
Conditions
If the seller accepts your offer, you can write up a sales contract, typically conditional on whether the inspection comes back clear.
Underwriting
We then send all the information over to the lender, who will provide the details to the underwriter.
During conventional loan underwriting, all the details that you provide about your finances and the property itself are thoroughly investigated to ensure that every detail is correct. You’ll then receive conditional approval, which means that the underwriter has taken a first pass and believes you qualify for the loan. They will also assess whether the seller has the legal right to sell the home by searching for the title, which helps protect you and the lender from any legal disputes in the future.
The lender will often come back and request further information from you, such as proof of homeowners’ insurance. Once you’ve provided this, the underwriter will take a second pass at the information and formally approve you for the loan.
Home Appraisal
This step occurs during underwriting and is an essential element of getting a mortgage. The home appraisal assures the lender that the home is worth its purchase price and that they are not overpaying for the property. An appraiser assesses the property’s condition and compares it to similar homes in the area to determine its market value.
There are several ways that appraisers may assess the value, including identifying how much it would cost to build a home in the exact same condition or by comparing the prices of recently sold homes with similar floor plans and rooms.
If you get a jumbo conventional mortgage, you may require more than one appraisal.
Clear to Close
After the appraisal, the underwriter will check over everything again and determine whether all the information is accurate. Finally, we’ll receive the greenlight that you are clear to close, and we can schedule the closing date. The title company working with the lender will send information regarding how to provide your down payment and other costs.
Closing Day
On closing day, you’ll receive a Loan Disclosure form, which tells you how much you have borrowed, how much you will pay back each month, and any additional restrictions. You’ll provide a personal check or bank check for the down payment and closing costs, then sign paperwork that officially declares the home is yours. Congratulations!
conventional loans
Achieve the home of your dreams with conventional loans!
Explore Our Home Loan Options
We make the mortgage process easy by working with numerous mortgage lenders, helping you find the right loan for your specific situation.
Conventional Loan Requirements
Conventional loan requirements are stricter than those for government-backed mortgages, but they are still manageable for most borrowers. Our loan officers will help ensure that your application is in the best shape possible so that you have a seamless approval process, with particular attention to these main factors.
Wide Range of Loan Terms
Conventional loans allow you to choose between a 15-year or 30-year rate, depending on your particular circumstances. If you can afford a higher monthly payment to pay your loan off sooner and build equity faster, then a 15-year term might be a great option for you.
Most conventional loans are 30-year loans, which gives you an ample three decades to pay off your loan amount. This loan term is a good option if you have a steady job, don’t intend to move any time soon, and would prefer lower monthly mortgage payments to afford other expenses.
Fixed or Adjustable Interest Rates
FHA loans and other government loans are generally fixed-rate mortgages, meaning you have a fixed interest rate throughout the loan term.
However, you have greater freedom with a conventional loan and can choose an interest rate that suits your needs. A fixed-rate loan means that your monthly mortgage payment will stay the same throughout the life of your loan, making it easier to predict your future monthly payments. This is good for those on a fixed income who need to budget for their loan payments long-term.
However, not all conventional loans fit this mold. You can also seek out an adjustable-rate mortgage, which has a variable interest rate that will go up after a set period of time. Pride
Lending’s loan officers can help guide you through these decisions to find the perfect conventional mortgage for your needs.
Potentially Lower Interest Rates Compared to Government-Backed Loans
Though Federal Housing Administration, Department of Veterans Affairs, and US Department of Agriculture loans are often touted as having the best interest rates, this is not always true.
These loan types are often reserved for those with lower credit scores who can’t qualify for a conventional mortgage; they are considered subprime loans. Even though the private lender will be compensated for a portion of the loan balance should the borrower default, they may still protect themselves by demanding higher interest payments.
As such, conventional mortgage loans may offer more competitive interest rates than FHA loans, USDA loans, or VA loans for those with a good credit score and a reasonable down payment. Conventional loans are also more plentiful, so you can shop around for the best rate possible.
No Upfront Mortgage Insurance Premium
FHA loans require upfront mortgage insurance premiums, even for those with a good credit score. This expense is 1.75% of the overall loan amount and is in addition to a down payment and closing costs. FHA loan borrowers also must provide annual mortgage insurance premiums for the entire life of their loan if they provide less than a 10% down payment.
While 1.75% may not seem like much, every upfront cost adds up, making it difficult to afford your new home. Conventional loans don’t require an upfront mortgage insurance premium, and if you provide a down payment of 20% or more, you won’t have private mortgage insurance either.
Additionally, you stop having to pay private mortgage insurance when your loan-to-value ratio drops below 80%.
More Flexibility With Property Types
A USDA, VA, or FHA loan can only be used to purchase a primary residence of up to four units, meaning that you can’t buy a second home or investment property with these loan types. However, conventional loans are more flexible regarding what you can purchase.
There’s no stipulation that you need to reside in the property full-time, nor that you can’t rent it out. This means that conventional loans, thanks to their competitive interest rates, are often an excellent choice for investors who intend to keep their property long-term and gain rental income.
Conventional VS Federal Housing Administration (FHA) Loans
Conventional loans are often a better choice than FHA loans, especially in high-cost areas, because the conforming loan limit is higher than the FHA loan limit. Those using an FHA home loan may be priced out of the best areas in their region.
If you want to borrow beyond those limits, you can also apply for a jumbo loan, which isn’t an option with the FHA program.
Fixed-Rate Mortgages
Fixed-rate loans have the same interest rate throughout the loan. Your interest rate will be set at the beginning of the term, and at the start of the mortgage, more of your monthly payment will go toward the interest than the principal. As you continue to make payments, the ratio flips, and you start paying down the principal. This is the most popular loan choice for LGBTQ+ borrowers: 83% of LBGTQ+ individuals chose a fixed-rate mortgage.
Predictable Monthly Mortgage Payment
One advantage of fixed-rate conventional loans is that your payment will be the same throughout the life of your loan, which makes it easier to budget for the long term. This is a good option for those on a fixed income, such as senior citizens or those with a stable job.
Pros and Cons
Most conventional mortgages are fixed-rate because they are steadier and more predictable. This is useful for those who are established in their careers and expect to be making the same income for the long term.
However, there are some downsides to this. You must time the market carefully to ensure that you can get the best rate possible, which may mean that you have to wait longer to purchase a home than if you went with an ARM.
If rates drop significantly in the next few years, you may not be able to refinance if you do not make a large enough down payment, as lenders typically want you to have at least 20% home equity before they allow you to refinance.
Adjustable-Rate Mortgages (ARMs)
Adjustable rate loans mean that your rate changes throughout the life of your loan. You’ll enjoy a low interest payment at the beginning of your term before the rate adjusts to the current market rate, when your monthly payment will be higher.
This is a good option for younger borrowers who expect their gross monthly income to rise significantly in the next few years and for those who do not intend to stay in their homes forever.
Adjustable-Rate Mortgages (ARMs)
Adjustable rate loans mean that your rate changes throughout the life of your loan. You’ll enjoy a low interest payment at the beginning of your term before the rate adjusts to the current market rate, when your monthly payment will be higher.
This is a good option for younger borrowers who expect their gross monthly income to rise significantly in the next few years and for those who do not intend to stay in their homes forever.
Initial Lower Interest Rates
At the beginning of your loan term, you’ll enjoy much lower interest rates than you could get with any other loan program. This allows you to save up for when the adjustment period begins or put your funds towards other debts that you may have in order to improve your borrowing profile.
Adjustment Periods and Rate Caps
ARMs are usually sold as 5-year or 7-year adjustable rates. This means that for the first 5 or 7 years, you will have the same rate as when you began the loan, after which time the rate will rise to the current market rate. It will then continue to adjust at set intervals for the rest of the term.
How often your rate adjusts depends on the specific loan you choose. For example, a 5/1 ARM would have the same rate for the first five years and then change every year.
Typically, there is a threshold for how high your rate can go, so you will be protected if the rates are much higher when the adjustment period begins.
Pros and Cons
An adjustable-rate conventional loan can be a good option for those who are just starting out in their career but expect to make significantly more in the coming years based on the market.
They can also be an excellent choice for someone who does not intend to stay in their home for more than a decade, as they can pay the introductory rate and then sell the property, with the borrower assuming the rest of the balance.
However, ARMs do come with their risks. Borrowers who are not familiar with the terms of their loan may find themselves suffering sticker shock when the adjustment period begins, and they may have higher monthly expenses they need to budget for.
Those who choose this type of conventional loan and who run into financial difficulties several years down the road may also be at risk of default.
Costs Associated with Conventional Loans
As with any mortgage, a conventional loan has some significant upfront expenses that must be accounted for before you sign anything. Pay close attention to these costs to ensure that you start your homeownership journey on track.
Interest Rates
Your interest rate is determined by your borrowing profile, which includes your credit score, debt-to-income ratio, and the amount of down payment you provide.
Well-qualified borrowers can expect to get rates closer to the prime mortgage rate, which is the rate that would be provided to a statistically perfect borrower. Those with a lower credit score or who can’t provide a larger down payment will have to pay more over the life of their loan.
Fortunately, you can use many down payment assistance programs to provide a larger upfront payment, which will help lower your rate. Our team can help match you to down payment assistance options in your area to cover the difference between your savings and lenders’ expectations.
Closing Costs
Closing costs compensate those who have helped in the loan approval process, which includes title companies, attorneys, underwriters, and realtors. If you had a lawyer look over the buying contract, you would typically have to pay underwriting and origination fees, as well as real estate attorney fees.
Other closing costs include a title search, appraisal, inspection, and surveying fee.
Depending on your area, you may be expected to provide an earnest money deposit that protects both you and the seller should the deal fall through. In most cases, the seller will pay the real estate commission for both the buyer and the seller.
Mortgage Insurance
Our team at Pride Lending will assist you with every step of the conventional mortgage approval process, ensuring that your journey to homeownership is as smooth as possible. When working with us, you can expect assistance with each of these steps toward securing a conventional loan.
The Conventional Loan Process
Our team at Pride Lending will assist you with every step of the conventional mortgage approval process, ensuring that your journey to homeownership is as smooth as possible. When working with us, you can expect assistance with each of these steps toward securing a conventional loan.
Choose Pride Lending for Your Conventional Loan
Pride Lending is the first mortgage company catering to borrowers who have often been shut out of homeownership due to discrimination.
Our founder, Andrew Dort, was recognized as the 2022 National Association of Mortgage Brokers (NAMB)’s Broker of the Year for his excellent service. Additionally, our entire team is composed of allies and members of minority groups, which includes BIPOC and LGBTQ+ individuals. We’re here to help everyone, no matter their identity.
Pride Lending’s loan officers are committed to getting you the best rates on a conventional mortgage. We provide personalized service that will get you the perfect conventional loan for your needs with utmost efficiency. Pride Lending’s experienced and service-minded team is here to advocate for you, serving as a helpful intermediary between home buyers and mortgage lenders.
We are a Certified LGBT Business Enterprise recognized by the National Gay and Lesbian Chamber of Commerce, and we are fiercely dedicated to our LGBTQ community.
