Unconventional Wisdom About Conventional Mortgage Loans

Conventional loans are, by far, the most popular type of home loan, accounting for more than two-thirds of mortgages nationwide. Unlike loans by the Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA), conventional home loans are not part of a government program. Rather, they are an agreement between a private lender and a homebuyer with no rules that limit who can apply.

Basic though they may be, not all conventional mortgage loans are created equal. Here are five lesser-known facts about conventional loans.

Conventional home loan fact # 1: You don’t need to put 20 percent down

While a 20 percent down payment may be the gold standard for avoiding mortgage insurance premiums and getting a rock-bottom interest rate, it's not a requirement for conventional loans. Conventional loans generally require an upfront payment of 5 to 20 percent of the purchase price of the home, but the down payment may be as low as three percent.

Keep in mind that, in addition to the down payment, borrowers are often responsible for origination fees, mortgage insurance premiums (if the down payment is less than 20 percent) and appraisal fees at closing.

Conventional home loan fact # 2: The 30-year fixed mortgage is just one of many options

Though they are sometimes called the plain-vanilla mortgage option, conventional loans actually come in a wide variety of flavors. Choose between a fixed interest rate or an adjustable interest rate loan and term lengths of anywhere from 10 to 30 years. 

Conventional home loan fact # 3: Prices vary between lenders

A mortgage, like a car, is a product, and you’ll find varying rates among lenders. Interest rates, closing costs, origination fees and appraisal fees may differ from one lender to the next. After you submit a loan application, financial institutions have three days to provide a loan estimate with important details about the loan you requested. The loan estimate should include the estimated interest rate and monthly payment, along with a breakdown of closing costs, insurance and taxes. 

Conventional home loan fact # 4: Perfect credit isn’t necessary

Because conventional loans are not guaranteed or insured by the federal government, they are riskier for financial institutions than other loan types and typically have tougher lending standards. But you don’t need perfect credit to qualify for a conventional loan. Most lenders require a minimum credit score of 620 to obtain a conventional loan, and a score of 740 to get the best mortgage rate. Lenders will also look at your debt-to-income ratio (your monthly debt payments divided by your gross monthly income), which should be below 43 percent for a conventional home loan.

Conventional home loan fact # 5: You can save money in overall mortgage costs

If you can meet the credit and down payment criteria, a conventional home loan may be the best value in terms of selection, overall costs and monthly payments. While the interest rate may be slightly higher on a conventional mortgage than an FHA loan, you won’t have to pay the upfront premium of 1.75 percent required for FHA loans.

Most importantly, a conventional home loan allows you to avoid costly private mortgage insurance by putting down 20 percent or more. And if you don’t have the equity initially, you cancel mortgage insurance when the principal loan balance drops to 78 percent of the home’s value. Most FHA loans, on the other hand, charge mortgage insurance premiums for the life of the loan.

There are many factors to consider when choosing a home loan. To find out more about Zions Bank’s mortgage loans, or for specific down payment information, contact a mortgage loan officer.