If you started the home buying process, you've seen it around before and you're probably wondering, “conventional in what sense? I don't understand.”

Conventional Loan ≠ FHA Loan

Well, I'm going to talk about what a conventional loan is and the way I'm going to explain it in terms of what it's not and what it is not is an FHA loan.

An FHA loan is a loan that's backed by the United States government. So, if you default on your mortgage, they're on the hook. A conventional loan isn't like that. So, if you default on your mortgage, the lender takes the hit and there are a couple of different things that you need to know whether you're getting a conventional or an FHA loan and which is the best for you.

Conventional loans usually require a credit score of 680 or more. FHA loans are a little bit more flexible with that. Also, FHA loans allow you to put less money down, in some cases as low as 3.5%.

Conventional loans - you can still do this, but you're going to have a little bit more of a difficult time with lenders in cobbling together a loan that's maybe an 80-20 loan and then another 90-10 loan, which means that you're getting more loans in order to pay your down payment. FHA loan, it's one loan conventional, you can get more than one for the house that you're trying to buy.

Private Mortage Insurance

Now, if you're putting less than 20% down on a conventional loan, you're going to have to pay what's called private mortgage insurance. Private mortgage insurance is the difference between that 20% and what you're putting down. So, say you're putting down only 10%. Well, you have to pay that 10% eventually in another monthly form. So, you're getting there, you're still paying that 20%. You're just paying it over time. Once you pay off that 10%, say it stops. So eventually those payments stop and your mortgage payment theoretically goes down a little bit every month.

The last thing is conventional loans allow you to have a little bit more debt than you normally would. If you're getting an FHA loan, usually it's 45% is the max. In some cases, they let you go up to 50%. That's your debt-to-income ratio. It's just how much money you owe versus how much money you earn.

So, when you start the home-buying process, you get a lot of things thrown at you. A lot of acronyms, a lot of jargon that the industry just kind of assumes that you know what you're talking about and it's ok to ask questions. Nobody is born knowing what a conventional loan is versus an FHA loan.

So, if you have questions, don't be a stranger, just reach out and we can help. Thanks.