Conventional Home Loans: Advantages, Disadvantages, Requirements 2022

Aside from the government-backed loans that you know, another option for home buyers who wish to have a mortgage can resort to conventional home loans.

As reported in 2022, conventional loans were responsible for purchasing 78.5 percent of all newly constructed homes during the year’s first three months.

But is a conventional loan for first-time home buyer-friendly? Will the requirements be the same for all? Don’t worry! This article will guide you through the pertinent information about conventional home loans to prepare you before applying for one.

Conventional Home Loans Explained

Conventional home loans, conventional mortgage, conventional loan — these are different terminologies referring to the same thing. They all pertain to a particular type of loan not provided or guaranteed by a government agency or institution.

Instead, borrowers may get traditional mortgages via private lenders, including credit unions, banking institutions, and mortgage firms.

Who is Eligible For a Conventional Loan?

Conventional house loans are easier for those with middle-income to high-income levels. It is because traditional home loans typically need a down payment and excellent financial background to secure a fair interest rate.

It sets them apart from loans guaranteed by the government, such as loans from the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans, and other products designed for those with lower incomes, and makes it possible for these individuals to own houses.

Advantages of Conventional Home Loans

You can reduce your headache from thinking of how to purchase a home without emptying your pocket by opening your options for a mortgage. Conventional loans are also worth considering, like government-backed loans.

Here are several advantages you get to experience with this type of home loan!

No Specific Program Costs

Although you will likely still be required to pay lender fees, conventional loans omit the program-specific expenses associated with government-backed loans.

For instance, the upfront cash premium for a Federal Housing Authority loan is 1.75 percent; the financing charge for a VA loan ranges from 1.4 percent to 2.3 percent, based on your initial payment. You will not get charged for these with a conventional loan!

Fixed Interest Rates

The interest rate for conventional mortgages is typically fixed, which does not vary throughout the loan’s lifetime. It contrasts with adjustable-rate mortgages, in which the interest rate fluctuates.

It saves you the trouble of considering fluctuating nominal rates that can immensely impact your interest payable. However, this also has a wrong side. Spoiler alert, one of the disadvantages of conventional home loans is the high-interest rates in most cases.

 The interest rate attached to a conventional mortgage is determined by several elements, one of which is the terms of the loan, which include its duration, total amount, and the present circumstances of the economic or financial market.

You can also be approved for a loan with an adjustable interest rate; however, this will mainly be determined by your credit score and your general credit history.

Better Regulation of Mortgage Insurance

When the down payment on a traditional loan is much less than 20 percent, private mortgage insurance (PMI) is required. However, after your principal loan debt falls to 78 percent of the home’s value, you may request the cancelation of your PMI.

More Flexibility in Loan Structuring

Other loan durations, such as 15- or 20-year loans, are available, despite the typical 30-year fixed-rate mortgage being the most frequent kind.

Because lenders are not required to adhere to plans defined by the government, they are free to develop other alternatives.

Disadvantages of Conventional Home Loans

All good things also come with their disadvantages. To give you well-balanced information about conventional home loans, here are the disadvantages you must consider when deciding if you should pursue one.

More Stringent Loan Requirements

Since the federal government does not insure conventional mortgages and loans, the standards banks and other creditors must meet to lend money to borrowers are often more stringent.

As the borrower, it requires you to have a more stable source of income to commit to your loan commitments and pay on time to prevent headaches and consequences.

Higher Interest Rates

A conventional loan rate for its interests is often higher than on government-backed mortgages like a federal housing loan. It happens when the Federal Reserve targets a higher federal funds rate, making it more costly for banks to borrow money. 

As a result, the bankers pass on the increased costs to their customers, which often increases interest rates for consumer loans, including mortgage interest rates.

Conventional Loans’ Technical Requirements

Like any other loan application, conventional loan requirements 2022 includes paperwork you will submit to the lending agency. These are paper documentation that establishes your ability to pay your loans promptly and consistently.

Documentation Showing Proof of Income

One of the paper requirements of conventional home loans is your proof of income to clear you against the possibility of default.

This proof will include, but may not be limited to, pay stubs displaying income for the preceding thirty days and net revenue for the year to date, federal tax returns for the past two years, and so on.

It can also include either two months or a quarterly statement of your asset accounts, including your bank savings, checking, and any investment accounts.

The potential borrowers also need to be ready with evidence of other ways of making money, such as bonuses or side businesses.

Documentation Showing Proof of Employment

Lenders in today’s market want to ensure that they only provide loans to borrowers with a consistent employment background.

Not only would your creditor request to see your pay slips, but they may also contact your company to confirm that you are still working and inquire about your compensation.

If you have switched employment over the last several months, a lender may wish to get in touch with your former company. Self-employed borrowers must furnish substantial supplementary documentation detailing their businesses and incomes.

Tips to Better Qualify For Conventional Home Loans

As previously established, the qualification requirements for conventional loans are stricter than the government-backed loans such as the loans provided by the FHA, VA, and the United States Department of Agriculture (USDA).

Although it is stricter, it does not necessarily mean it is harder to be granted one. In fact, more Americans are reported to get a conventional mortgage rather than a federal-backed one in 2022.

To save you some trouble and help your loan application get approved fast, here are some tips for you to better qualify for conventional home loans!

Maintain Clean Record Against Past Foreclosures and Bankruptcies

Mortgages guaranteed by the government often have more flexible qualifying requirements than conventional loans. As a direct consequence of this, prior foreclosures and bankruptcies are forgiven a great deal quicker.

Homebuyers who have recently filed for bankruptcy or experienced foreclosure and would generally be qualified for a conventional mortgage may be required to wait more before a creditor approves the loan.

Sadly, there is always the possibility that the homebuyer’s loan application won’t be accepted at all. So to prevent this from happening, we hope you have a clean track record with your finances, and please maintain that!

Keep Your Debt to Income Ratio Low

Your debt-to-income (DTI) ratio is calculated by comparing your total monthly debt payments to your gross income. To get this ratio, take your gross monthly income and deduct the total amount that you spend each month toward your debts.

Your DTI would be fifty percent if you spent fifty percent of your monthly income on payments to creditors and other debts. The ideal DTI ratio should be below 43 percent — the lower it is, the better.

As observed with private borrowing institutions, homebuyers with a DTI more significant than 43 percent would likely have difficulty obtaining approval for a conventional mortgage from most mortgage providers.

Get Yourself a High Credit Score

Accumulating credit scores is not a one-time thing. Most likely, you cannot get a high credit score with just one credit record with the bank. You have to earn it while maintaining a good relationship with them.

One of the conventional home loan requirements is a minimum credit score of 620. And the higher it goes, the easier your application will be accepted. You also become eligible for a subtype of a conventional loan, the jumbo loan or mortgage.

Several ways to improve your credit score include monitoring your credit reports, maintaining a maximum 30% credit utilization, paying your credit bills consistently on time, and keeping your old credit accounts open instead of creating new ones.

Ready to Apply For a Conventional Home Loan?

A conventional home loan gets you closer to your goal of owning a housing property. Whether for personal or commercial use, residential property is an investment that will be valuable to your portfolio.

Are you ready to kickstart your conventional loan application? Before applying for one, it helps to seek assistance from mortgage professionals to get your base covered.