What Is a Conventional Loan? Everything You Need to Know
A conventional loan is one of the most popular mortgage options for homebuyers. Unlike government-backed loans like FHA or VA loans, conventional loans are not insured by a federal agency. Instead, they are offered by private lenders, banks, and financial institutions. These loans are ideal for borrowers with strong credit profiles and stable incomes.
At Eroica Financial Services, we specialize in providing competitive conventional loan options. Our goal is to make homeownership accessible and straightforward for our clients.
How Does a Conventional Loan Work?
A conventional loan operates as a standard mortgage agreement between the borrower and the lender. It follows the guidelines set by Freddie Mac and Fannie Mae, two government-sponsored enterprises that purchase and guarantee mortgages from lenders. These loans can be used to finance primary residences, secondary homes, and investment properties.
Key Characteristics of a Conventional Loan:
- Loan Limits: Conventional loans adhere to limits set annually by the Federal Housing Finance Agency (FHFA). In 2024, the conforming loan limit is $726,200 in most areas.
- Credit Requirements: Borrowers typically need a credit score of at least 620, though higher scores unlock better interest rates.
- Down Payment Options: Conventional loans require a down payment of as little as 3% for first-time buyers, but larger down payments can reduce monthly payments and eliminate private mortgage insurance (PMI).
- Private Mortgage Insurance (PMI): Borrowers who put down less than 20% are usually required to pay PMI, which protects lenders in case of default.
Types of Conventional Loans
There are two main types of conventional loans:
1. Conforming Loans
Conforming loans meet the borrowing limits and standards set by Fannie Mae and Freddie Mac. They are ideal for most homebuyers and offer competitive interest rates.
2. Non-Conforming Loans
Non-conforming loans, such as jumbo loans, exceed the FHFA loan limits. They are designed for borrowers purchasing high-value properties.
Advantages of a Conventional Loan
Opting for a conventional loan offers several benefits:
- Lower Interest Rates: Borrowers with excellent credit can secure competitive interest rates.
- Flexibility: Conventional loans can be used for various property types, including single-family homes and multi-unit residences.
- No Upfront Mortgage Insurance: Unlike FHA loans, conventional loans don’t require an upfront mortgage insurance premium.
- Loan Term Options: Choose from flexible terms, such as 15, 20, or 30 years.
Requirements for a Conventional Loan
Before applying for a conventional loan, it’s essential to meet the following criteria:
- Credit Score: A minimum credit score of 620 is generally required, though a score above 740 is ideal for better terms.
- Debt-to-Income (DTI) Ratio: Your DTI ratio should be below 43%, though some lenders may accept up to 50% with compensating factors.
- Down Payment: Prepare for a down payment of 3% to 20%, depending on your financial situation and the loan terms.
- Stable Income: Lenders require proof of consistent income and employment history.
At Eroica Financial Services, we assess your financial profile to match you with the right conventional loan.
How to Apply for a Conventional Loan
Applying for a conventional loan is a structured process. Here’s what to expect:
1. Prequalification
Start by getting prequalified. Provide basic financial information to estimate how much you can afford.
2. Gather Documentation
Compile essential documents, including:
- Proof of income (pay stubs, tax returns).
- Bank statements.
- Credit history.
3. Choose a Lender
Eroica Financial Services offers personalized guidance to help you select the best conventional loan for your needs.
4. Complete the Loan Application
Submit a formal application with all required documents. The lender will evaluate your credit, income, and financial stability.
5. Underwriting and Approval
The underwriter reviews your application to ensure it meets lending guidelines. Once approved, you’ll proceed to closing.
Conventional Loans vs. Government-Backed Loans
Understanding the differences between conventional loans and government-backed loans can help you make an informed decision.
| Feature | Conventional Loan | Government-Backed Loan |
| Insurance | No government insurance | Backed by FHA, VA, or USDA |
| Down Payment | As low as 3% | As low as 0% (VA/USDA); 3.5% (FHA) |
| Credit Score | Higher requirements (620+) | More lenient (500+ for FHA) |
| PMI Requirements | Required if < 20% down payment | FHA requires upfront and monthly MIP |
| Property Types | Primary, secondary, and investment properties | Mostly primary residences |
Why Choose Eroica Financial Services for Your Conventional Loan?
Eroica Financial Services takes the stress out of securing a conventional loan. Here’s why homeowners choose us:
- Expert Guidance: Our experienced team walks you through every step of the process.
- Tailored Solutions: We match you with the right loan based on your unique needs.
- Local Expertise: With services in your area, we understand the local housing market.
Whether you’re a first-time buyer or looking to refinance, Eroica Financial Services ensures a smooth, efficient loan experience.
Service Areas for Eroica Financial Services
Eroica Financial Services proudly provides conventional loan services in:
- Dallas, TX
- Fort Worth, TX
- Dayton, TX
- Plano, TX
- Granbury, TX
Contact our team today for personalized assistance if you’re ready to explore your options.
Conclusion
A conventional loan is a flexible, cost-effective option for financing your dream home or investment property. You can take advantage of competitive interest rates and terms by meeting basic requirements like credit score and down payment. With expertise in conventional loans, Eroica Financial Services is here to guide you through every step of the process.
