All You Need to Know About Conventional Loans – Part 2

This is the second part of a two-part article about conventional loans. Before reading below, make sure you’ve checked out the first part to learn about conventional loans, the requirements, and their different types.

Now that we know about the basic information of conventional loans, it is important to understand their differences from government loans and what are its advantages and disadvantages.

Conventional vs. FHA Loans

FHA loans are government-backed loans designed to help people with limited funds or bad credit purchase a home. They are much more flexible and have more lenient qualification requirements.

One of the main differences between conventional loans and FHA loans is flexibility. FHA loans allow borrowers to have a debt-to-income ratio of a maximum of 50%, while conventional loans only allow about 43%. However, FHA loans often require a 3.5% minimum downpayment, while conventional loans only usually ask for 3%.

Another key difference between conventional and FHA loans is the credit score requirements. FHA loans have more relaxed credit score requirements than conventional loans, allowing borrowers with lower credit scores to qualify. Conventional loans typically require a minimum credit score of 620, while FHA loans can be approved with credit scores as low as 580.

Conventional vs. USDA Loans

USDA loans are mortgages backed by the U.S. Department of Agriculture. These loans are designed to help people in rural areas buy a home.

One of the main differences between conventional and USDA loans is the downpayment size required. With a conventional loan, the buyer is typically required to put down a minimum of 3%. With a USDA loan, however, no downpayment is required. As long as the property is in a USDA-approved area and you meet the requirements, you don’t need to put down any amount immediately.

The income requirements for conventional loans and USDA loans also vary. With a conventional loan, the buyer must have a steady income to qualify, regardless of the rate. With a USDA loan, however, the buyer must be in a low or middle-income bracket, with the maximum income possible being around $90,300.

What Are the Advantages of a Conventional Loan?

Conventional loans offer several advantages over other loan types. These advantages include the following:

• Lower Interest Rates. With a conventional loan, the buyer has a much lower interest rate than with an FHA loan, a USDA loan, or a VA loan. This is because conventional loans are not backed by the government and therefore do not require the same fees and insurance that other loans require.
• Larger Loan Amounts. Conventional loans also offer larger loan amounts than most other loans. This can be useful especially for those who want to buy a higher-priced property.
• No Mortgage Insurance. Conventional loans do not require borrowers to pay for mortgage insurance, as is the case with government-insured loans. This can save borrowers hundreds of dollars per month.

What Are the Disadvantages of a Conventional Loan?

There are several disadvantages of conventional loans to consider before taking out a mortgage. Read these drawbacks below:

• Tighter Requirements. While conventional loans do not require mortgage insurance, the lender may require a higher credit score and down payment. As a result, these loans are not ideal for first-time homebuyers.
• Stricter on Past Bankruptcies and Foreclosures. If you have previously experienced bankruptcy or foreclosure, you may have difficulty qualifying for a conventional loan. Lenders will often require a waiting period of at least four years after the bankruptcy is discharged before they will consider you for a loan.

Conclusion

You should consider conventional loans if you do not want a government-backed loan. However, it is important to know their requirements and to meet them as they can be quite strict. It is also necessary to understand their advantages and disadvantages to know if they’re the right loan for you.

Call Your Trusted Mortgage Expert Today

If you are a first-time home buyer looking for a loan, you can contact us at MidAmerica Bancorp Inc. We can help you find the best loan product for your needs and lifestyle. Our service areas include Oak Lawn, Burbank, Hickory Hills, Chicago, and throughout the states of Illinois, Indiana, Florida, Michigan or Wisconsin. Get in touch with us at (708) 237-4050 to learn more about what we can do for you.