Home Conventional Loans: Pros and Cons

Explore the advantages and disadvantages of home conventional loans to make an informed decision. Learn about the flexibility, interest rates, down payment requirements, and more. Find expert guidance and assistance for your home financing needs.

A conventional home loan is a mortgage that is not insured by a government agency like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, it's backed by private lenders, and its insurance is usually paid by the borrower. This type of mortgage is among the most common, accounting for around 60% of all home loans. Like every other financing option, conventional home loans come with their own set of pros and cons. The decision to opt for this type of loan should be based on an individual's financial situation, long-term plans, and understanding of the advantages and disadvantages involved. 

The Pros of Conventional Home Loans

  • Flexibility: Conventional home loans offer a variety of terms, ranging from 10 to 30 years, and include fixed and adjustable rates. This flexibility allows borrowers to choose a mortgage plan that best fits their financial situation and long-term goals.

  • Lower Costs: If a borrower can put down 20% or more as a down payment, they can avoid paying for private mortgage insurance (PMI), which can significantly reduce the overall cost of the loan.

  • Higher Loan Limits: Conventional loans typically offer higher loan limits than government-backed loans. This makes them an excellent option for people looking to buy a more expensive home.

  • Less Red Tape: Conventional loans often involve less bureaucracy and red tape than government-insured loans, which can make the application and approval process smoother and quicker.

The Cons of Conventional Home Loans

  • Strict Qualification Requirements: Conventional loans usually have stricter qualification requirements compared to government-backed loans. Borrowers often need a high credit score, a low debt-to-income ratio, and a substantial down payment.

  • Higher Down Payments: While it's possible to get a conventional loan with a down payment as low as 3%, most lenders require a down payment of at least 5-20%. For many first-time homebuyers, gathering this amount can be challenging.

  • Risk of Foreclosure: Because conventional loans aren’t guaranteed by the government, if a borrower defaults, the risk is shouldered by the lender. As a result, lenders may act faster to foreclose on a home financed through a conventional loan.

  • Variable Interest Rates: Some conventional loans come with adjustable rates, which means the interest rate can increase over time. This can result in higher monthly payments, which can strain a borrower’s finances.

Popular Conventional Lenders

If you're considering a conventional home loan, it's important to shop around for the best rates and terms. Here are a few popular conventional lenders:

  • Quicken Loans: Known for excellent customer service and a wide range of mortgage options, Quicken Loans is a popular choice for conventional loans. 

  • Wells Fargo: This lender offers both fixed and adjustable-rate conventional loans, with a variety of term lengths.

  • Bank of America: With competitive rates and a variety of loan options, Bank of America is a strong choice for conventional loans. 

Conventional home loans can be an excellent choice for homebuyers with a strong credit history and the ability to make a sizeable down payment. They offer flexibility, higher loan limits, and the potential for lower costs. However, they can also come with stricter qualification requirements and a higher risk of foreclosure. Before deciding on a conventional loan, it’s crucial to understand the pros and cons, and to compare rates and terms from different lenders. Always consult with a financial advisor or mortgage professional to find the best home loan option for your individual circumstances.