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Why Choose a Conventional Loan?

Good credit, low debt, and a steady income could get you low interest rates and terms.

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City condo, charming cottage, country cabin - you probably have a pretty good idea of what your first home will look like. But can you say the same about your home mortgage?

When it comes to financing your home, you’ve got various home loans to choose from, depending upon your income, debt, credit history and other factors. And while each loan type has its pros and cons, the most popular home loan for new and repeat homebuyers continues to be the conventional loan.


What is a conventional loan?

A conventional loan is a traditional loan that is used to purchase property. It has several attractive features that make it a great choice for many people, especially first-time homebuyers who have good credit, some funds saved for a down payment and are at low risk for defaulting. These features include:

  • Low-interest rates
  • Fast loan processing
  • Diverse down payment options
  • Low private mortgage insurance (PMI)
  • No PMI required if down payment is 20% or more

Conventional loans are not insured or guaranteed through a government agency but follow guidelines set by Fannie Mae and Freddie Mac, two agencies that help standardize mortgage lending in the U.S.


Do you qualify?

As with any home loan, you’ll need to prove you make enough money, that your income is expected to continue, you have enough assets to cover the down payment, and you have a pretty good credit history.


Unlike government loans that repay the lender if the buyer stops making their mortgage payment, conventional loans do not have this built-in guarantee. Because they are a higher risk for the lender, the conventional loan also has higher standards to qualify. But don’t let this information scare you away – qualifying for a conventional loan is not difficult for the average home buyer.


You may qualify if you have:

  • Good credit history
  • Healthy savings account
  • Well established employment
  • Debt below 50% of your gross monthly income (including projected house payment)
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The down payment 

As a new homeowner, it’s always nice to have a little extra cash in the bank in case you have to replace your hot water heater or need a new mattress for your guest room. And while putting 20% down will keep you from paying private mortgage insurance (PMI), you might not have that much cash on hand or want to completely drain your savings account. This is where the flexibility of the conventional loan can work to your advantage. 


For example, you may qualify for a conventional loan with a down payment as low as 3%. While you will have to pay PMI, you can choose to pay it upfront, as part of your monthly mortgage payment, or a combination of the two. And unlike some government-backed loans, you’ll be able to cancel your mortgage insurance when your principal loan balance drops to 78% of the home’s value.


Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. Not all borrowers will qualify.


On your terms

Like most loans, you can decide how long you want to be paying your mortgage. While a shorter term results in higher monthly payments, it can also save you thousands of dollars over the life of the loan. That’s because the interest rate is typically lower on a 15-year mortgage, and because the term is half as long as a 30-year mortgage, you’ll pay a lot less interest over the life of the loan.  But if that doesn’t work for your budget, you can still snag a low fixed-interest rate for a 30-year term, giving you some breathing room to cover the other costs of homeownership. Conventional loans come in 15, 20, 25 and 30-year terms.


Adjustable or fixed?

With a fixed rate, the interest rate is fixed for the life of the loan, typically 15 or 30 years. This ensures that your payment remains the same each month and you know how much money to set aside to cover the bill. And if interest rates rise, you don’t have to worry about your monthly payment going up. As a tradeoff for the security you’re getting, fixed-rate mortgages typically have a slightly higher interest rate than adjustable-rate mortgages.


An adjustable-rate mortgage is a loan that starts off with a low fixed interest rate for an initial period of time (anywhere from 1-10 years), and then adjusts periodically to reflect changes in market interest rates. As a result, your monthly payment could go up or down depending on interest rates when your loan adjusts. If they go up, your monthly payments will too, and that’s a gamble many people are unwilling to take.


There are pros and cons to both loan types and what makes sense for you will depend on your situation. Your loan officer can help you choose the best loan based on your current needs and future goals.



Live where you want

Unlike many other home loans, one of the biggest advantages of a conventional loan is the wide range of property types that you can finance. These include:

  • Primary home
  • Property with a lot of acreage
  • Condos
  • Second home/vacation home
  • Investment properties
  • Nonconforming (such as bermed houses)
  • Manufactured homes


Student loan debt

If you’re worried your student loan debt will keep you from getting approved for a home loan, it helps to understand how the home loan process works. Once you submit your loan application, your lender will look at your credit history, your assets, and your debt-to-income (DTI) ratio. This ratio is used to determine if you have the ability to manage monthly payments and repay debt. Your debt includes your student loan payments, car payments, credit card and personal loan payments.


The effect of a student loan on your debt-to-income ratio will certainly be a factor on whether you will be approved for a home loan so it’s important to manage your debt responsibility and within recommended guidelines (see below).


You can calculate your DTI ratio by dividing your total monthly debt by your monthly gross income. You should try and keep your total debt (housing, car loans, credit cards, student loans, etc.) below 50 percent of your monthly income. And remember, by paying your monthly bills on time and focusing on paying down your debt, you can work on getting your credit score in mortgage-ready condition. 


Not intended as credit counseling, accounting or investment advice. Contact your financial representative for more information.



Another option: the HomeReady® conventional loan

The HomeReady®  mortgage is another type of conventional loan program that can help you achieve homeownership without meeting some of the traditional requirements for a down payment. The 97% financing option (3% down payment) and low mortgage insurance are just two of the benefits of this loan. To qualify, you can combine income from other sources including roommates or family members or non-occupants (such as a parent or other family member who will not live in the home).*


You may qualify if you:

  • Are a first-time or repeat homebuyer
  • Have limited cash to make a down payment
  • Have low or moderate income
  • Receive supplemental income from boarders or renters

Conventional Loans at a Glance


Conventional HomeReady®

Down payment

Minimum 5%

Minimum 3%

Mortgage insurance

Required if less than 20% down

Low MI options

Income limits None Area median income except for targeted areas
Credit score Higher than government loans Flexible credit requirements
Seller contributes to closing costs

Less than 10% down: 3%

10-25% down: 6%

25% or more: 9%


Debt-to-income ratio 43-50% 45%
Down payment assistance Yes Yes
Gift funds for down payment Yes Yes
Closing costs Higher than government loans Can be a gift
Uses Primary, second homes, condos, manufactured homes, nonconforming, and investment properties Primary, eligible condos, co-ops, PUDs, manufactured homes
Cancellable mortgage insurance Yes Yes

Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. Not all borrowers will qualify.


Bottom line

With its low interest rates and fees, a conventional loan can be a great option if you have strong credit and can make a minimum 3-5% down payment. Not sure if it’s right for you? We’re happy to sit down with you to discuss your goals and find the best home loan to meet your needs. We’d love to hear from you.


Looking for other home loan options? Download our Mortgage Home Options Guide.


Loan Options Guide


Janet Veach
Janet Veach
Janet Veach is the Communications Specialist for Amerifirst Home Mortgage. As the former Communications Director with the Alzheimer’s Association in Central Illinois, she believes that building strong relationships leads to dynamic partnerships that can dramatically improve our neighborhoods and communities. The mother of three sons, she has heard many a good story, and specializes in creating content that educates, communicates our core values and promotes genuine relationships with our customers.

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