In this article
- Current Conventional Loan Interest Rates
- How to Compare Conventional Mortgage Rates
- 1. What’s the APR? (Not just the interest rate)
- 2. How high is your credit score?
- 3. How big is your down payment?
- Conventional Loan Rates vs. FHA
- What Is The Upside Of Taking A Conventional Loan?
- How Does A Conventional Loan Work?
- Conventional Loan Limits
- What are the Pros and Cons of a Conventional Loan?
- How Much of a Down Payment is Needed for a Conventional Loan?
- Is it Difficult to Secure a Conventional Loan?
- Why Do Sellers Prefer Conventional Loans?
- Are Conventional Mortgage Rates Going Down In 2020?
Conventional loans are the bedrock of mortgage lending. Probably the cheapest mortgage options to refinance or finance, conventional loans are readily available, simple, and attractive. On top of that, they are flexible. With this type of loan, you can reduce your interest rate by having a bigger down payment or high credit rating.See How Easy it is to Get Your Custom Rate!
By simply doing some research, consumers can find conventional loan rates that are extremely affordable.
Current Conventional Loan Interest Rates
Today, mortgage rates are sitting near record lows, and convention loans are no different. Here’s how current conventional loan rates compare to VA and FHA mortgages*:
|Loan Type||Interest Rate||APR|
|Conventional 15-Yr Fixed-Rate||4.25%||4.281%|
|Conventional 30-Yr Fixed-Rate||4.875%||4.909%|
|FHA 30-Yr Fixed-Rate||5.25%||5.673%|
How to Compare Conventional Mortgage Rates
From a distance, conventional loan rates look higher than VA, USDA, or FHA. However, the marketed rates are not written into stone – they can easily change. This is because your interest rate is extremely specific to you. Also, interest rates don’t tell the complete story when it comes to conventional loans.
You may realize, depending on your application, that a conventional loan is much more affordable for you than any mortgage. So, before deciding that conventional loan rates are “too high”, ask yourself these 3 questions:
1. What’s the APR? (Not just the interest rate)
APR is extremely crucial when comparing mortgages. This is because it represents loan fees and the interest rate together – offering you a better picture of how much a loan actually costs.
For example, the above table shows that 30-year conventional rates are quoted at 3.25%, while 30-year FHA rates are 2.5%. The latter may seem like a more cost-effective deal.
However, APR flips everything around. APR for the same FHA loan is 3.478%, while APR for the conventional loan is 3.25%. Factor in the extra costs for financing common with USDA, VA, and FHA programs and the APRs can skyrocket.
2. How high is your credit score?
Your credit score plays a more crucial role when determining the fees and rates you are going to get on a conventional loan than when you are applying for a government-backed loan.
If you have a good credit score, you can easily get lower mortgage insurance rates and lower interest rates with a conventional loan.
3. How big is your down payment?
Typically, conventional loans are perfect for anyone who can make a huge down payment. This is because, the more cash you can put down, the lower your interest is going to be.
If you can make a 20% down payment, you will not incur any cost when it comes to mortgage insurance. On the other hand, USDA, VA, and FHA loans charge an upfront “guarantee fee” or mortgage insurance regardless of the size of the down payment.
So, if you are in a position to make a 20% or even 10% down payment, a conventional loan might give you lower rates and better terms than a government-backed loan.
Conventional Loan Rates vs. FHA
FHA loans and conventional loans constitute most of the mortgage industry – most property buyers choose one or the other. But, which option is the best for you?
One way to compare conventional loans vs. FHA loans is to consider costs and interest rates.
Take a look at how conventional loans and FHA loans may compare when you consider monthly payments, interest rate, and down payment. Some things that you should be on the lookout for include:
- There’s no mortgage insurance on conventional loans that include a 20% or more down payment. This helps to lower monthly payments
- FHA mortgage insurance rates stay the same, while conventional mortgage insurance get cheaper with a bigger down payment
- FHA interest rates are usually lower. However, monthly payments may be higher based on mortgage insurance rates
Using our conventional and FHA mortgage calculators, this is what you are going to find:
|Loan Type||Down Payment||Loan Amount||Interest Rate||Upfront MIP||Annual MIP||Monthly MIP||Monthly P&I||Total Monthly Payment|
|Conventional 97||3% ($9,000)||$291,000||3.25%||$0||$3,780 (1.3%)||$315||$1,266||$1,581|
|FHA||3.5% ($10,500)||$294,500||2.75%||$5,100 (1.75%)||$2,500 (0.85%)||$208||$1,203||$1,411|
|Conventional||10% ($30,000)||$270,000||3.25%||$0||$1,380 (0.5%)||$115||$1,175||$1,290|
What the above table indicates is that a conventional borrower with 20% or 10% down enjoys lower monthly payments when compared with a FHA borrower or a conventional borrower who makes a lower down payment.
In reality, however, many people don’t have the ability to make huge down payments all at once.
So, how do you choose between a FHA loan with 3.5% down and a conventional loan with just 3% down?
Both loans let you buy a house sooner. The ability to buy sooner as opposed to later can mean significant equity if the value of property rises.
FHA and conventional loans are distinct financial products with very varying objectives.
The FHA loan program is attractive to first-time buyers and people who don’t have very good credit ratings. You can qualify for this loan program with a credit score of as low as 500. Because the government secures the loan facility, lenders can offer these loans to borrowers with just 3.5% down.
A conventional loan may be more suitable than a FHA loan program if you have a good credit rating or if you can make a big down payment like 5 to 10 percent of the value of the property. Remember, a large down payment on a conventional loan offers you lower interest rates and helps you save cash on mortgage insurance. FHA does not lower your interest rates if you make a huge down payment.
What Is The Upside Of Taking A Conventional Loan?
Conventional loans are preferred by many borrowers because of several reasons, including:
- There’s no mortgage insurance if you make a down payment of 20% or more
- If you do have mortgage insurance, you can stop paying for it once you accumulate enough equity in your property
- Strong applicants (with a big down payment and good credit) can get lower interest rates
- You can borrow more via a conventional loan facility than with a FHA loan program
- Fixed-rate conventional loans are typically cheaper than fixed-rate loan options
- Borrowers can find conventional loans with as little as 3% down
How Does A Conventional Loan Work?
A simple example of how a conventional loan works is where you make a 20% down payment on your house and the lender pays the remaining 80% needed to buy the property.
If a home costs $500,000, you’d have to make an initial down payment of $100,000 while the lender will pay $400,000. This means the lender wants to achieve an 80% LTV (loan-to-value) ration.
20% down is no longer needed. Nowadays, buyers can get a conventional loan with as little as 3% down.
A 20% down payment used to be mandatory for conventional mortgages. However, 20% is no longer needed. Nowadays, buyers can get a conventional loan with as little as 3% down.
Obviously, all mortgage products have various requirements on top of the down payment. A couple common requirements you may come across include:
The DTI (debt-to-income) ratio for conventional loans is usually around 43%. This means that up to 43% percent of your gross monthly earnings can be used to pay recurring debts such as auto financing, student loans, credit card debt, and housing costs. Mortgage companies may allow a higher DTI ratio if you have a high credit score or sufficient financial holdings. However, with new concerns on growing risks, it’s advisable to stay under the 43% standard.
With a conventional loan, you may need a credit score of at least 620. But, in today’s market – with new income and employment risks brought about by the COVID-19 pandemic – mortgage companies have raised credit score requirements. Some companies demand that you have a credit score of 700. This means that buyers need to shop around for both terms and rates.
You need to prove that you have a stable job and income. This is often down with W2s, although bank statements can also be used for self-employed borrowers who don’t have the necessary tax reports.
Remember, all these factors will have an effect on your rate. The stronger your application, the lower your rate will be.
Conventional Loan Limits
Most financiers put strict limits on the amount of money that a person can borrow.
For 2022, the conventional loan limit in most locations for a single-family home is $647,200 as opposed to $420,680 for FHA mortgages.
As of this year, the VA program has no loan limit for eligible borrowers.
What are the Pros and Cons of a Conventional Loan?
No loan product is perfect for each borrower. This means that even conventional loans have their upsides and downsides.
Cost. A conventional loan is more likely to have a lower interest rate than other types of mortgage loans
Adjustable or fixed. Conventional loans are available with either an adjustable or fixed rate
Application ease. If you’re a buyer with cash reserves like stocks, mutual fund balances, savings, etc., a debt-to-income ratio at or below 43%, and an excellent credit score, you are likely to get approval for your loan application in record time.
Term. Traditional mortgages are available in 30-year and 15-year terms, but other terms can be negotiated. If you refinance and ask for a 20-year term, lenders can arrange that for you
No location restrictions. With USDA loans, eligible candidates must come from specific areas. This is not the case with conventional loans
Ideal for different types of properties. Conventional loans are available for investment real estate, vacation properties, second homes, and prime residences
FHA loans require a significant initial insurance cost. This cost may be paid in the form of a larger loan amount or simply as cash. Conventional loans don’t require you to make an initial insurance payment
A conventional loan will be extremely difficult to secure if you don’t have a good credit score (at least 620)
Debts. Many recurring debts like housing costs, auto payments, students loans and credit card payments can derail your loan application if the DTI ratio is too high
Mortgage insurance costs. Conventional loan borrowers have to pay more for insurance than FHA borrowers when they make smaller down payments
How Much of a Down Payment is Needed for a Conventional Loan?
Banks have always preferred that borrowers get mortgage loans with a 20% down payment. This is because a large equity cushion was thought to lower the bank’s risk. However, a lot has changed over the years.
The 20% down payment requirement for conventional loans has been a hindrance to many borrowers who simply don’t have that kind of money.
“In 2019, the average down payment was 12% for all borrowers, 16% for repeat borrowers, and 6% for first-time borrowers.”
In recent years, industry thinking has dramatically shifted. Studies by the Urban Institute have found that the default rates for borrowers with 3% down and 10% down are equal.
What matters more – what makes a difference – is the buyer’s credit rating. This observation has resulted in conventional loans being made available to borrowers with as little as 3% down thanks to Fannie Mae HomeReady and Freddie Mac Home Possible programs.
Is it Difficult to Secure a Conventional Loan?
Mortgage loans are neither easy nor difficult to secure. The main issue depends on the requirements of the loan program, the collateral represented by the property, and the qualifications of the borrower.
Data from Ellie Mae indicates that in early 2020, buyers seeking to refinance were most likely close with conventional mortgages (55%) when compared to FHA mortgages (20%), and VA mortgages (23%). But, the situation was different for home buyers. Conventional mortgage borrowers had a 45% close rate, while VA borrowers had a (77%) close rate, while FHA loans had a (80%) close rate.
Why Do Sellers Prefer Conventional Loans?
Sellers want to get rid of their property and close the deal without any delay or hassle. When faced with identical offers, many owners may prefer conventional financing because it has fewer challenges than USDA mortgages with 0% down (and not all locations are eligible), or FHA loans (the property has to meet specific requirements), or VA financing (you must be VA qualified).
Are Conventional Mortgage Rates Going Down In 2020?
It’s never been easy to predict mortgage rates – and this year is probably one of the hardest to predict in recent decades. We not only have the typical economic volatility to consider, but also the ongoing pandemic.
What we can confidently say is that mortgage rates are sitting pretty low at the moment.
In May 2020, the weekly rate for a fixed-rate, 30-year mortgage reached 3.15% according to Freddie Mac. This is the lowest rate since the company began keeping records in 1971.
Rates could tank even further or they could shoot up dramatically. This is the nature of mortgage rates, but they have never been this consistently low as they are today. So, if you find a rate and loan program that suits your needs and circumstances, don’t hesitate to close the deal. The best way to get started is to get your rate and closing cost quote! It takes less than 30 seconds to see all your available options.See How Easy it is to Get Your Custom Rate!