Commit to putting at least 10% down. A down payment of 20% is even better because you can avoid PMI!
A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders, and its insurance is usually paid by the borrower.
What Is the Difference Between Conventional and Government-Backed Loans?
When you’re thinking about your mortgage options, it’s important to understand the difference between conventional loans and government-backed loans.
Government-backed loans include options like VA loans—which are available to United States Veterans—and Federal Housing Administration (FHA) loans. FHA loans are backed by the Federal Housing Administration, and VA loans are guaranteed by the Veterans Administration.
With an FHA loan, you’re required to put at least 3.5% down and pay MIP (mortgage insurance premium) as part of your monthly mortgage payment. The FHA uses money made from MIP to pay lenders if you default on your loan.
To qualify for a VA loan, you must be a previous or current member of the U.S. Armed Forces or National Guard—or have an eligible surviving spouse. A VA loan requires no down payment, but you must pay a one-time funding fee, which usually ranges from 1%–3% of the loan amount.
With a conventional loan, the lender is at risk if you default. If you can no longer make payments, the lender will try to recoup as much of the remaining balance as they can by selling your house through a short sale process or even foreclosure. You didn’t think borrowers get out of not paying for their house, did you? No way!
Because of this additional risk to the lender, you’re required to pay private mortgage insurance (PMI) on a conventional loan if you put less than 20% down.
Benefits of a Conventional Loan
There’s a reason why conventional loans are so popular. This type of loan has several features that make it a great choice for most people:
- Low interest rates
- Fast loan processing
- Diverse down payment options, starting as low as 3% of the home’s sale price
- Various term lengths on a fixed-rate mortgage, ranging from 10 to 30 years
- Reduced private mortgage insurance (PMI)
Because conventional loans offer so much flexibility, there are still some decisions you have to make even after you choose this loan type. You’ll also have to consider how much you can put down, how long you want your loan term to be, and how much house you can afford.
We know that sounds pretty overwhelming, but don’t panic! We’ve got some super simple tips to help you confidently buy a house with a conventional loan.
Dave Ramsey Date Unknown What is a Conventional Loan and how does it work https://www.daveramsey.com/blog/what-is-a-conventional-loan