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Understanding Conventional Loans: A Guide for Maryland Homebuyers

  • Jeffrey Lewis
  • Jan 3
  • 4 min read

Hello, and welcome back to the blog! I’m Jeffrey Lewis, a local real estate agent here in Maryland. If you're considering buying a home, you've likely heard of conventional loans, but understanding how they work and how they compare to other loan types is crucial.


In today's post, we're going to break down everything you need to know about conventional loans—from the requirements and qualifications to the pros and cons. Let’s dive right in!



Understanding Conventional Loans:

Conventional loans are one of the most common types of home financing, but unlike FHA, VA, or USDA loans, they are not backed by any government program. Instead, these loans are offered by private lenders like banks and credit unions. Because they lack government backing, conventional loans tend to have stricter requirements, but they also offer more flexibility in certain areas.


Requirements & Who Qualifies for Conventional Loans

Now that you know what conventional loans are, let’s talk about who qualifies and the specific requirements you need to meet.

  1. Credit Score: One of the biggest factors in qualifying for a conventional loan is your credit score. Generally, you'll need a credit score of at least 620 to qualify. However, the higher your score, the better your interest rates will be.

  2. Down Payment: Conventional loans usually require a down payment, which can vary depending on your financial situation. For first-time buyers, down payments can start as low as 3%, but it’s also common to see 5%, 10%, or even 20%. If you put down at least 20%, you’ll avoid paying for private mortgage insurance (PMI), which can save you a significant amount over time.

  3. Debt-to-Income: Ratio Lenders will look at your debt-to-income (DTI) ratio, which measures how much of your monthly income goes toward paying off debt. Ideally, you want a DTI of 36% or lower, although some lenders may accept up to 45% under certain circumstances.

  4. Owner Occupancy: Conventional loans can be used for primary residences, second homes, and even investment properties. However, if you’re buying a primary residence, the property must be owner-occupied, meaning you must live there for a specified period after the purchase.


Pros and Cons of Conventional Loans

Like any loan type, conventional loans have both advantages and disadvantages. Let’s take a look at the key pros and cons:

Pros:

  1. No Government Restrictions: Unlike FHA or USDA loans, conventional loans don't have location or income restrictions. This gives you more flexibility in terms of where you can buy.

  2. Lower Mortgage Insurance Costs: If you put less than 20% down, you’ll need to pay private mortgage insurance (PMI), but once you’ve built 20% equity in your home, you can cancel it. This is a huge advantage over FHA loans, where mortgage insurance lasts for the life of the loan.

  3. More Loan Options: Conventional loans offer more loan term options, such as 15-year or 30-year fixed-rate mortgages, and even adjustable-rate mortgages (ARMs). You can choose the loan that best fits your financial situation.

Cons:

  1. Higher Credit Score Requirements: To qualify for the best interest rates and loan terms, you’ll need a solid credit score, usually in the mid-to-high 700s. If your score is lower, you may face higher rates or even difficulty qualifying.

  2. Larger Down Payment Required to Avoid PMI: While you can get a conventional loan with a 3% down payment, if you can't put down at least 20%, you’ll be required to pay PMI. This can add up over time and affect your monthly payments.



Tips for First-Time Conventional Loan Buyers

If you’re thinking about using a conventional loan to buy your home, here are some tips to help you navigate the process:

  1. Improve Your Credit Score Before Applying Conventional loans are credit-sensitive, so it’s a good idea to work on improving your credit score before applying. Paying down debt and fixing any errors on your credit report can help you secure a lower interest rate.

  2. Save for a Larger Down Payment If possible, aim to save for a 20% down payment. This will help you avoid PMI and lower your monthly payments.

  3. Shop Around for Lenders Conventional loans are offered by many different lenders, so it’s important to shop around for the best interest rates and loan terms. Even small differences in rates can make a big difference in the long run.

  4. Work with a Knowledgeable Real Estate Agent Navigating the loan process can be tricky, so it’s important to work with a real estate agent who is familiar with conventional loans. They can help you find the best lender and negotiate the best terms for your purchase.


Final Thoughts

Conventional loans are one of the most popular loan options for homebuyers, and for good reason. They offer flexibility, competitive rates, and a wide variety of loan terms. Whether you’re a first-time buyer or a seasoned homeowner, a conventional loan could be the right choice for you.


If you have any questions or need help with your homebuying journey, feel free to drop a comment below or reach out to me directly. I’m always happy to help.


Here’s to the next move always being your best move!

 
 
 

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