Conventional loans are by far the most common loan type. If your credit profile is strong (and you don’t qualify for a VA loan), consider getting a conventional loan. You can put down as little as 3% of the purchase price with a credit score of at least 620, depending on certain factors.
There is an additional cost to your monthly payment in the form of private mortgage insurance (PMI) if you put less than 20% down. You, the borrower, are required to pay for this insurance policy in case you default or stop paying on the loan. But the good news is you can have this extra cost removed when you build up 20% equity in the home, unlike an FHA loan that will always include PMI.
You can later remove PMI by refinancing into a brand-new loan. You can also have PMI removed from your existing loan by paying down your loan enough that you have 20% in equity or through your property appreciating by 20%. You would need to pay for an appraisal to verify the higher property value, and then you can request that the lender remove the PMI from your monthly payment.
Tip: Equity is the dollar difference between how much your property is worth and how much you owe on it. For example, if your home is worth $200,000 and you owe $150,000, you have $50,000 in equity.
You can use conventional loans for a second home or investment property with up to 4 units, not just for a primary residence. Conventional loans can offer the choice of an ARM or a fixed interest rate loan. And some types of conventional loans can be used for “fixer upper” properties.
You can also get a larger loan amount, based on your qualifications of course, called a jumbo loan. (Loan size limits vary by county.)
Fixed Rate Mortgages: Your rate and payment never change.
- 30 Year Fixed Loan
Benefits: Lowest fixed monthly payments
- 20 Year Fixed Loan
Benefits: Low fixed monthly payments
- 15 Year Fixed Loan
Benefits: Lower rate than the 30 or 20 Year Fixed Loans; Pay less interest and pay your home off more quickly.
- 10 Year Fixed Loan
Benefits: Lower rate; Pay off your loan and build equity faster.
- 5 Year Fixed Loan
Benefits: Lowest rate; Pay off your loan and build equity the fastest
Adjustable Rate Mortgages: After the initial period your interest rate can change once a year.
- 3/1 ARM
Fixed Rate for 3 Years, Adjustable Rate for the remaining 27 years
- 5/1 ARM
Fixed Rate for 5 Years, Adjustable Rate for the remaining 25 years
- 7/1 ARM
Fixed Rate for 7 Years, Adjustable Rate for the remaining 23 years
For Purchase transactions Conventional Loans require the home-buyer to put down at least 5% - 20% of the purchase price of the home. For a Refinance transaction, most lenders require at least 10% equity in the property.
Most conventional loan programs allow you to purchase single-family homes, warrantable condos, planned unit developments, and 1-4 family residences. A conventional loan can also be used to finance a primary residence, second home and investment property.