Conventional Mortgages—Are They Right For You?

Pros:

• Competitive interest rates: If you have a strong credit report and a score in the mid-700s, this could save you money in the long run with a highly competitive interest rate.
• Lower rates than unsecured debt: Since a mortgage is a secured debt—meaning the lender has collateral if you default on payments—these loans are offered at lower interest rates than unsecured loans, such as credit cards.
• Faster equity building: Equity builds much faster if you choose to make a higher down payment (up to 20%) upfront.
• Flexible terms: Lenders may be more flexible with terms and conditions than with government-backed loans like FHA or VA loans, which must strictly adhere to rigid agency guidelines.

Cons:

• Debt-to-income limits: When you apply for a conventional loan, your total debt plays a huge role in your approval. While a maximum 45% debt-to-income (DTI) ratio is standard, underwriters may allow up to 50% under strict conditions if you possess strong credit scores and cash reserves.
• Down payment flexibilities: While putting 20% down avoids extra costs, you aren't forced to pay that much upfront; modern conventional loans actually allow down payments as low as 3% for qualified buyers.
• Private Mortgage Insurance (PMI): If you take advantage of lower down payment options and put down less than 20%, you will have to pay for private mortgage insurance (PMI) until you build up 20% equity in the home.
• Stricter qualification after financial hardships: While the final lending decision rests on the underwriter's review, a previous foreclosure or bankruptcy will heavily impact your eligibility. You will generally need to wait a mandatory 2 to 4 years after a bankruptcy discharge before qualifying for a conventional loan.