Do you want to buy a house in Texas or refinance the mortgage? Then consider taking a conventional loan. The reasons are straightforward: it's in demand as such loans give good options and affordable interest rates to borrowers with respectable credit and income stability.
Whether you’re buying your first home, looking to invest in property, or wanting to refinance for better terms, conventional loans provide options tailored to different financial situations. They come with features that can fit various budgets and goals, making them a go-to choice for many Texans.
In this book, we'll describe what conventional loans are, different kinds of conventional loans, and some qualification requirements. It's also important that we compare them to FHA loans, detail the whole process of applying for a loan, and provide Texas-specific information to assist you along the way. You'll also learn tips on getting the best loan terms and how best to navigate the mortgage process without causing yourself hassle.
What Is a Conventional Loan?
A conventional loan is a type of mortgage that does not receive funding from a government agency such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, these loans come from private financing institutions such as banks, credit unions, and mortgage companies.
Since they are not insured by any government agency, conventional loans may be harder to qualify for; however, their terms and prices can be relatively flexible if the applicant qualifies for the loan.
Key Features of Conventional Loans:
- No Government Insurance: Unlike FHA or VA loans, conventional loans do not require government insurance, which saves upfront and ongoing costs.
- Variety of Loan Terms: Borrowers can choose from a range of loan terms, typically between 10 and 30 years.
- Flexible Loan Limits: While conforming loan limits apply to many conventional loans, jumbo loans are available for borrowers needing higher amounts.
There are two main types of conventional loans:
- Conforming Loans: These loans follow guidelines set by Fannie Mae and Freddie Mac, including loan limits and credit requirements.
- Non-Conforming Loans: Also known as jumbo loans, these exceed conforming loan limits and typically require higher credit scores and larger down payments.
How Conventional Loans Work:
The lender then appraises whether to grant a conventional loan through credit score evaluation, income level, employment record, and DTI. After qualification, you'll provide a down payment and enter a contract of paying monthly towards principal, interest, taxes, and insurance on your property. You get interest rate depending on how you rank by your credit score or the loan duration.
Types of Conventional Loans
Here are some common types of conventional loans:
1. Fixed-Rate Conventional Loan
A fixed-rate loan offers a consistent interest rate for the entire term, which can be 10, 15, 20, or 30 years. This means your monthly payment will remain steady, making it easier to plan your budget.
Fixed-rate loans are ideal for homeowners who plan to stay in their homes for a long time and prefer predictable payments.
2. Adjustable-Rate Conventional Loan (ARM)
An ARM has a low fixed interest rate for a term that can be either 5, 7, or 10 years. At that point, it is readjusted yearly according to the market rates. It can work out to your advantage if you plan to sell or refinance before the adjustment period.
Borrowers whose income is supposed to increase within the near future or those with a short plan of owning a property may see the advantage through the lower initiating rates of ARMs.
3. Conventional 97 Loan
This loan allows first-time homebuyers, who can purchase a home at as low as 3% of the total price of a home. For this, they have to bear private mortgage insurance (PMI) until reaching 20% equity.
This is a good option for buyers who have good credit but not much savings for a down payment.
4. Jumbo Loans
Jumbo loans are above the conforming loan limits of the Federal Housing Finance Agency (FHFA). They are mainly used to purchase high-value homes and often have stricter qualifications, such as higher credit scores and larger down payments.
These loans are very popular in high-cost areas where home prices exceed standard loan limits.
5. Interest-Only Loans
With interest-only loans, the debtor pays only interest for a term, usually ranging from 5 to 10 years, at which point the debtor will be paying both interest and principal. This can provide a lower first payment but ultimately costs more.
Buyers anticipating significant improvements in their financial position often opt for interest-only loans.
6. Portfolio Loans
Portfolio loans are held by lenders and not sold to investors. These loans have more lenient terms and are ideal for borrowers who may not qualify for conventional lending.
Conventional Loan Requirements
Applicants who receive conventional loans tend to meet several of the criteria as follows
- Credit Score. 620. Generally, minimum. More the 740.
- Down Payment For a first home buyer, any down payment might be accepted which is as small as 3% but that with 20% will avoid PMI and enjoy a less costly interest expense.
- Debt-to-Income Ratio (DTI): Most lenders require a DTI of 43% or lower, but sometimes they will consider higher ratios if there are sufficient compensating factors.
- Stable Income: Lenders will ask for documentation of steady income, including pay stubs, W-2 forms, and tax returns.
- Loan Limits: In Texas, the conforming loan limit for 2025 is $726,200 for most counties. Higher limits may apply in high-cost areas.
- Cash Reserves: Some lenders demand that borrowers have savings equal to a few months of mortgage payments.
Factors That Affect Approval:
- Employment History: Having a steady employment history for at least two years can increase your chances of approval.
- Credit Utilization: Keeping your credit card balances low can increase your credit score.
- Additional Assets: Having other assets, such as investments or retirement accounts, can strengthen your application.
Why Choose a Conventional Loan?
Here are some reasons why conventional loans are a popular choice:
- Lower Interest Rates: Borrowers with strong credit can secure lower interest rates compared to government-backed loans.
- No Upfront Mortgage Insurance: Unlike FHA loans, conventional loans don’t require an upfront mortgage insurance premium, reducing closing costs.
- Flexible Loan Terms: You can choose a repayment term that fits your financial goals, from 10 to 30 years.
- Versatility: Conventional loans can be used to buy a primary residence, a second home, or an investment property.
- PMI Removal: Once you reach 20% equity, you can request to have PMI removed, which will lower your monthly payments.
- Higher Loan Limits: Conventional loans often have higher limits than government-backed loans, making them suitable for more expensive properties.
Conventional Loan vs FHA Loan
If you’re deciding between a conventional loan and an FHA loan, here’s a quick comparison:
| Feature | Conventional Loan | FHA Loan |
|---|---|---|
| Minimum Credit Score | 620 | 580 (with 3.5% down) |
| Down Payment | 3% (for first-time buyers) | 3.5% |
| Mortgage Insurance | Required if less than 20% down (PMI) | Required regardless of down payment |
| Loan Limits | $726,200 in most Texas counties | Varies by county |
| Property Type | Primary, second home, investment | Primary residence only |
If you have a lower credit score or limited funds for a down payment, an FHA loan may be a better fit. However, if you have good credit and can afford a larger down payment, a conventional loan could save you more in the long run.
Steps to Apply for a Conventional Loan
Here’s how to apply for a conventional loan:
- Check Your Credit Score: Make sure it meets the minimum requirement.
- Save for a Down Payment: Aim for at least 3%, though 20% is ideal to avoid PMI.
- Get Pre-Approved: Contact a lender to get pre-approved. This shows sellers you’re a serious buyer.
- Find a Home: Work with a real estate agent to find a property within your budget.
- Submit Your Application: Provide all required documents, such as income proof and bank statements.
- Close the Loan: Review the loan terms, sign the papers, and get the keys to your new home.
Tips for a Smooth Application Process:
- Organize Your Documents: Keep your financial records handy.
- Avoid New Debt: Don’t open new credit lines or make large purchases before closing.
- Compare Lenders: Shop around for the best rates and terms.
Conclusion
A conventional loan is a versatile and cost-effective option for many homebuyers in Texas. Whether you’re purchasing your first home, refinancing, or investing, these loans offer competitive rates and flexible terms.
Ready to explore your options? Contact ZAPA Mortgage Inc. today. Our team is here to help you find the best loan program for your needs.
FAQs About Conventional Loans
1. Can I get a conventional loan with a 5% down payment?
Yes, many lenders offer conventional loans with as little as 5% down. First-time buyers may qualify for as low as 3% down.
2. How can I remove PMI from my conventional loan?
You can request PMI removal once you have 20% equity in your home.
3. What are current interest rates for conventional loans in Texas?
Rates vary based on your credit score and loan term. Contact us for a personalized quote.
4. Are there special programs for first-time buyers?
Yes, programs like the Conventional 97 loan offer low down payments and flexible terms.
5. How long does it take to close a conventional loan?
It typically takes 30 to 45 days, but this can vary depending on the lender.
Ready to get started? Visit ZAPA Mortgage to learn more or apply for pre-approval!