What does "Conventional loan" mean?

Definition

A conventional loan is a mortgage not guaranteed or insured by a government agency. These loans typically have stricter qualification requirements for borrowers compared to government-backed loans.

Understanding Conventional Loans

Conventional loans are often discussed when you're exploring mortgage options. They typically come into play after you've decided on a budget and started talking with lenders. In simple terms, these loans are not backed by a government agency. They focus on your credit score and income. Example: If you buy a $300,000 home with a 20% down payment, you'd finance $240,000. It's not true that conventional loans always require a perfect credit score. While good credit helps, various factors are considered. Remember, it doesn't automatically mean higher costs than government-backed loans.

People Want To Know

Do you have to put 20% down on a conventional loan?

No, you do not have to put 20% down on a conventional loan. Some conventional loans allow down payments as low as 3%. However, putting less than 20% down may require private mortgage insurance (PMI).

What salary do you need for a $400,000 mortgage?

Lenders typically require an annual salary of approximately $100,000 to $120,000 for a $400,000 mortgage. This estimate assumes a 20% down payment and a debt-to-income ratio of around 28% to 36%. Other factors, such as credit score and interest rate, can also influence the required income.

What are the downsides of a conventional mortgage?

Conventional mortgages often have stricter qualification requirements, including a minimum credit score of 620 and a debt-to-income ratio usually capped at 43%. Borrowers may also face higher interest rates and larger down payments, often around 5% to 20%. Additionally, private mortgage insurance (PMI) is required if the down payment is less than 20%, increasing monthly costs.

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More From The Mortgage Glossary

Credit report

A credit report is a detailed summary of your financial history. It includes information on all your loans, credit accounts, and payment history, which lenders use to assess your creditworthiness.

Credit score

A credit score is a three-digit number that represents your creditworthiness. It's based on your credit history, and a higher score indicates a lower risk to lenders, making it easier to get approved for a loan.

Debt-to-income ratio (DTI)

Your debt-to-income ratio, or DTI, is a number that compares your total monthly debt payments to your gross monthly income. Lenders use it to see if you can afford a new loan, and a high DTI can make it harder to qualify.