Conventional mortgages are not guaranteed or insured by the federal government, which translates to a higher risk for the lender and more stringent credit history and debt-to-income ratio requirements for home buyers. But for buyers who qualify, these loans frequently offer the lowest available interest rates.
These loans must conform to the guidelines set by the National Mortgage Association (also called “Fannie Mae“) and the Federal Home Loan Mortgage Corporation (also called “Freddie Mac”). But otherwise, individual lenders set their own standards and requirements for buyers.
In contrast with FHA and VA loans which impose strict eligibility requirements on the property to be financed, conventional loans offer much greater flexibility in the types of properties which can be financed, such as second and vacation homes, investment properties, and currently uninhabitable “fixer uppers” that are in need of extensive renovations prior to move-in or resale. These loans usually close (fund) more quickly than federally backed mortgages, giving home buyers an edge when making offers on highly sought-after properties in competitive markets, such as many desirable Los Angeles-area communities.
Conventional mortgages are the most difficult home loan to qualify for, and require a higher minimum down payment – usually 5 to 20% of the purchase price — although 3% down-payment programs are available to buyers in some circumstances. In contrast, FHA mortgages carry a 3.5% down-payment requirement, and with VA loans, no down payment is required. Also, closing costs and other fees may be higher on conventional mortgages than with FHA and VA loans.