Curve

Are conventional loan rates higher than other mortgages?

Peter Miller
The Mortgage Reports contributor

Conventional loan rates can be a bargain

Conventional loans are the foundation of the mortgage system.

Often the least expensive mortgage option to finance or refinance, conventional loans are attractive, simple, and available everywhere.

They’re also very flexible. With a conventional loan, you can lower your interest rate by having a high credit score or a bigger down payment.

By shopping around, many borrowers can find conventional loan rates today that are at or near all-time lows.

Verify your conventional loan eligibility (Oct 30th, 2020)

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Today’s conventional loan interest rates

Mortgage rates are currently resting near record lows, and conventional loans are no exception. Here’s how today’s conventional loan rates compare to FHA and VA mortgages*:

Loan Type Interest Rate APR
Conventional 30-Yr Fixed-Rate 2.625% 2.625%
Conventional 15-Yr Fixed-Rate 2.5% 2.5%
FHA 30-Yr Fixed-Rate 2.25% 3.226%
VA 30-Yr Fixed-Rate 2.25% 2.625%

*Interest rate and APR represent the lowest rate from The Mortgage Reports’ lender network on October 30, 2020. Your own rate will vary. You can get a custom rate quote here.

How to compare conventional mortgage rates

At a glance, conventional loan rates look higher than FHA, USDA, or VA. But advertised rates shouldn’t be taken at face value. First, because your rate is unique to you. And second, because interest rates don’t tell the whole story.

You might actually find that, based on your application, a conventional loan is much cheaper for you than any other mortgage.

Before writing off conventional loan rates as “too high,” ask yourself three questions:

What’s the APR? (Not just the interest rate)

APR is super important when comparing mortgages. That’s because it represents interest rate and loan fees combined — giving you a more holistic look at how much a loan actually costs.

For instance, as this is written 30-year FHA rates are quoted at 2.5%, while 30-year conventional rates are 3.25%. The FHA loan looks like a much better deal.

But APR flips the equation around. APR for that same FHA loan is quoted at 3.478%, while APR for the conventional loan is just 3.25%.

Add in the additional costs for financing associated with the FHA, VA, and USDA programs and loan APRs can jump.

How big is your down payment?

Conventional loans are usually the best choice for someone with a big down payment. That’s because the more money you put down, the lower your interest rate goes.

And, if you’re able to put at least 20% down, there will be no cost for mortgage insurance. FHA , VA, and USDA loans, on the other hand, charge mortgage insurance or an upfront “guarantee fee” regardless of down payment size.

So if you’re putting 20% down — or even 10% — a conventional loan might offer lower rates and bigger savings than a government-backed loan.

How high is your credit score?

Credit score has a bigger impact on rates and fees if you’re getting a conventional loan than it does if you’re getting a government-backed loan.

If you have “excellent” credit (in the mid- to high-700s), you stand to get lower interest rates and lower mortgage insurance rates with a conventional loan.

Verify your conventional loan eligibility (Oct 30th, 2020)

Conventional loan rates vs. FHA

Conventional loans and FHA loans make up most of the mortgage market — most home buyers end up with one or the other. But which one is right for you?

One sure way to compare FHA vs. conventional loans is to consider interest rates and costs.

Take a look at how FHA and conventional loans might compare when you consider down payment, interest rate, and monthly payments. A few things to pay attention to:

  • FHA interest rates are typically lower. But monthly costs may be higher depending on mortgage insurance rates
  • Conventional mortgage insurance gets cheaper with a bigger down payment. FHA mortgage insurance rates are always the same
  • There’s no mortgage insurance on conventional loans with 20% down or more. This significantly reduces monthly costs

Using our FHA and conventional mortgage calculators this is what we find.

Loan Type Conventional 97 FHA Conventional Conventional
Down Payment 3% ($9,000) 3.5% ($10,500) 10% ($30,000) 20% ($60,000)
Loan Amount $291,000 $294,500 $270,000 $240,000
Interest Rate 3.25% 2.75% 3.25% 3.25%
Upfront Mortgage Insurance Premium $0 $5,100 (1.75%) $0 $0
Annual Mortgage Insurance Premium $3,780 (1.3%) $2,500 (0.85%) $1,380 (0.5%) $0
Monthly Mortgage Insurance Premium $315 $208 $115 $0
Monthly Principal & Interest Payment $1,266 $1,203 $1,175 $1,044
Total Monthly Payment $1,581 $1,411 $1,290 $1,044

Rates shown are for sample purposes only. Your own rate and payment will vary. Get a custom rate quote here.

What the chart shows is that a conventional borrower with 10% or 20% down sees significant monthly savings when compared with an FHA borrower or conventional borrower who finances with just 3% down.

In practice, though, many borrowers do not have the financial capacity to make large down payments.

So how do you choose between a conventional loan with 3% down and an FHA loan with 3.5% down?

Both loans allow you to purchase a property sooner. The ability to purchase sooner rather than later can mean significant additional equity if property values increase.

Conventional loans and FHA financing are distinct financial products with very different goals.

But conventional loans and FHA financing are distinct financial products with very different goals.

The FHA loan program is especially appealing to first-time buyers and those with credit scores that are less than good. You can qualify with credit starting at 500 with some lenders, and 580-620 with most. Because the government guarantees the loan’s repayment, lenders will extend financing to borrowers with just 3.5% down.

A conventional loan might be more appealing than FHA if you have excellent credit — and especially if you can put 5% to 10% down.

Remember, a bigger down payment on a conventional can qualify you for lower mortgage rates and help you save money on mortgage insurance. FHA does not offer big discounts for big down payments.

Compare your mortgage options (Oct 30th, 2020)

What is the advantage of a conventional loan?

Conventional loans are the most popular type of mortgage. To name just a few reasons why:

  • Borrowers can find conventional loans with as little as 3% down
  • Fixed-rate conventional loans are generally less expensive than other fixed-rate loan options
  • You can borrow more with conventional financing than with FHA mortgages
  • Strong applicants (with good credit and a big down payment) can get lower interest rates
  • There’s no mortgage insurance with 20% down or more
  • If you do have conventional mortgage insurance, it can be canceled once you have enough equity in the home

How does a conventional loan work?

A classic conventional loan is simple. In the most basic example, you put down 20% and the lender puts up the remaining 80% to purchase a home.

If a home costs $400,000, you’d have an $80,000 down payment while the lender finances $320,000. This means the lender ideally wants an 80% loan-to-value (LTV) ratio.

20% down is no longer required. These days, borrowers can get a conventional loan with as little as 3% down.

20% down used to be the norm for conventional mortgages. But 20% down is no longer required. These days, borrowers can get a conventional loan with as little as 3% down.

Of course, all mortgage programs have requirements in addition to the down payment. A few major requirements to keep in mind are:

  1. The debt-to-income (DTI) standard for conventional loans is generally 43%. This means as much as 43% of your gross monthly income can go to pay recurring debts including housing costs, credit card debt, student loans, and auto financing. Lenders have allowed a higher DTI with compensating factors such as big reserves a high credit score. However, with new worries about risk it’s best to be at 43% or under.
  2. With a conventional loan, you likely need a credit score of 620. However, in today’s market — with the new employment and income risks created by the coronavirus — lenders have raised credit score requirements. Some want a credit score of at least 700. Such standards may change as the economy comes back. This means borrowers need to shop around for both rates and terms.
  3. You need to prove you have steady employment and income. This is typically done with W2s, though ‘bank statement loans‘ are another option for self-employed borrowers without traditional tax documentation

Remember, all these factors also impact your mortgage rate. The stronger your application, the lower your interest rate will be.

Conventional loan limits

Most loan programs have hard limits regarding the amount that can be borrowed.

For 2020, the conventional loan limit in most areas for a single-family home is $510,400, versus $331,760 for FHA mortgages.

The VA program, as of this year, has no loan limit for financially-qualified borrowers.

What are the pros and cons of a conventional loan?

No loan is perfect for every borrower, so it follows that conventional loans have their pros and cons.

Pros

  • Cost. A conventional loan is likely to have a lower interest rate than other forms of financing
  • Fixed or adjustable. Conventional loans are available with either a fixed or adjustable rate
  • Application ease. If you’re a borrower with good credit, a debt-to-income ratio at 43% or below, and cash reserves such as savings, mutual fund balances, stock, etc., then you are likely to fly through the application system
  • Term. Conventional mortgages are typically available in 15-year and 30-year terms, however other terms are also available. If you refinance and want a 17-year loan term lenders can arrange that
  • No location restrictions. With USDA loans financing is limited to certain areas, not so with conventional loans
  • Suitable for different properties. Conventional loans are available for prime residences, second homes, vacation properties, and investment real estate
  • FHA loans have a significant up-front insurance cost. This cost may be paid in cash or in the form of a larger loan amount. Conventional loans do not have an up-front insurance cost

Cons

  • Credit. A conventional loan will be tough to get without good credit (at least a 620 FICO score)
  • Debts. A lot of required monthly payments for credit cards, student loans, auto payments, and housing costs can derail a loan application if the debt-to-income ratio is too high
  • Mortgage insurance costs. With little down, conventional borrowers may face higher mortgage insurance costs than FHA borrowers

How much of a down payment is needed for a conventional loan?

Lenders have long wanted mortgage borrowers to purchase with 20% down. The reason is that a big equity cushion was thought to reduce lender risk. But the old-time benchmark has changed.

The 20% standard for conventional financing has long been a problem. Many borrowers simply don’t have such cash.

“In 2019, the median down payment was 12 percent for all buyers, six percent for first-time buyers, and 16 percent for repeat buyers.” –National Association of Realtors

According to the National Association of Realtors, “in 2019, the median down payment was 12 percent for all buyers, six percent for first-time buyers, and 16 percent for repeat buyers.”

In recent years lender thinking has changed. Research by the Urban Institute has found that the default rates for buyers with 3% down and 10% upfront are the same.

What counts most— what makes a difference — is the borrower’s credit standing.

The result is that conventional financing with as little as 3% down is now available with the Freddie Mac Home Possible and Fannie Mae HomeReady programs.

Is it hard to get a conventional loan?

Mortgage loans are neither hard nor easy to get. The real issue depends on the qualifications of the borrower, the security represented by the property, and the requirements of individual loan programs.

Figures from Ellie Mae show that in February 2020, borrowers seeking to refinance were most likely to close with conventional mortgages (55%) when compared with VA financing (23%), and FHA mortgages (20%).

However, the story was different for home buyers. Borrowers did best with FHA loans (80% closed) and VA financing (77%) while conventional borrowers had a 45% close rate.

Why do sellers prefer conventional loans?

Owners want to sell their property and close without hassle or delay. Given identical offers, many prefer conventional financing because it’s available with fewer hurdles than VA financing (you have to be VA qualified), FHA loans (the property has to meet certain standards), or USDA mortgages with 0% down (not all areas qualify).

Are conventional mortgage rates going down in 2020?

It’s always been hazardous to predict mortgage rates — and probably no year has been more uncertain than 2020. We not only have the usual economic ups and downs to consider, but also the coronavirus.

What we know is this: Mortgages rates are low.

In May 2020, the weekly rate for 30-year, fixed-rate financing reached 3.15% according to Freddie Mac. That’s the lowest rate since the company started to keep records in 1971.

Rates could fall lower still. Or, they could go up. This is always the case with mortgage rates — but they’ve never been as consistently low as they are now.

So if you get a quote you’re happy with today, don’t be afraid to lock it in.

Verify your new rate (Oct 30th, 2020)

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