Homebuyers

Why Conventional Mortgages are the Most Popular Home Loans

There are a lot of things to consider when it comes to buying a home. First and foremost is finding the home itself. Does it have the number of bedrooms you want? Is it in a good school district? Beyond that, there are financial considerations. Do you have the down payment saved up? Is your credit in a good place?

And then, there's what type of loan are you going to get.

For most people, the loan of choice is a Conventional loan. It's the most popular home loan used in the housing market with Census data showing that 73% of new single-family homes sold in 2023 were bought with a Conventional loan.

So, why are Conventional loans so popular?

Homebuyers often like Conventional loans because of their flexible down payment options, which can be as low as 3%, easier inspection requirements, and the opportunity to get rid of mortgage insurance.

"Conventional has first-time homebuyer perks," said Nathan Miller, a loan officer from New American Funding who is based out of Irvine, CA. "It [may] save you a lot of money."

Who should consider a Conventional loan?

Conventional loans can be helpful in several different situations including, first-time homebuyers, buyers who want to refinance, those who want to buy a second property (which is not allowed with government-backed loans), buyers with higher credit scores, or those who can put more money down.

"With strong credit, the borrower can qualify for a low interest rate on a Conventional loan, saving them money over the life of the loan," said Reid Sinclair, a loan officer at New American Funding who is based out of San Francisco.

With Conventional loans, homebuyers who can put down a full 20% down payment on their home can avoid mortgage insurance and may get better loan terms.

"I'd recommend a Conventional loan to a borrower if they have good-to-excellent credit scores, are putting 20% down or more, or who want to buy a condo or a manufactured home," said Sinclair.

Pros and cons of Conventional loans

One of the biggest advantages of Conventional loans is the flexibility around mortgage insurance. Mortgage insurance protects lenders in case a homeowner stops being able to make payments on their home. Different home loans require different types of insurance.

Conventional loans require private mortgage insurance (PMI) with any down payment amount under 20%. However, PMI can be eliminated when you reach 20% equity in your home.

That's different than the mortgage insurance premium required by Federal Housing Administration (FHA) loans, which spans the life of the loan.

"The more down payment, the lower the risk and lower the mortgage insurance will be," said Miller. "Once you have 20% down, no mortgage insurance is required. FHA, on the other hand, requires you to have mortgage insurance for the life of the loan."

Conventional loans also have more flexible appraisal requirements and offer appraisal waivers.

"A Conventional loan's appraisal is less likely to demand repairs/modifications to the home," said Sinclair. "Making a Conventional offer on a new home more competitive."

The biggest challenge of Conventional loans is their credit score requirement.

"If you have a low down payment, 3%-5%, you likely can't get a Conventional approval without a credit score over 660," said Miller. "Typically, low down payment plus sub-660 score will only get approved on government loans."

What can you do if you want to get approved for a Conventional loan?

Since so many of the benefits of a Conventional loan are credit score dependent, one of the best things you can do is improve your credit score before you apply.

"Conventional loans are very credit score sensitive," said Miller. "If you do not have the best credit, try working on getting your scores up before applying for a home loan."