What Is Conventional Housing & How Is It Financed?

Conventional housing refers to a common type of residential property that meets specific standards in real estate and lending. This term is frequently encountered when discussing home purchases and financing options. Understanding what qualifies as conventional housing and how it is financed can provide clarity for individuals navigating the housing market. This article aims to clarify the meaning of conventional housing and its associated financing mechanisms.

Characteristics of Conventional Housing

Conventional housing describes traditional, site-built homes adhering to established construction and local building code standards. These properties are constructed on the land where they will permanently reside, ensuring compliance with regional regulations. They are designed to be affixed to a permanent foundation, a durable base made from materials like concrete or masonry that firmly anchors the home to the ground. This permanent attachment is a distinguishing feature.

Conventional homes utilize standard construction materials and techniques, contributing to their long-term durability and ability to withstand local conditions. Property valuation is performed through appraisals that compare them to similar homes in the area. Conventional housing encompasses various ownership structures, including single-family dwellings, townhouses, and condominiums, as long as the physical structure meets the defined criteria.

Conventional vs. Non-Conventional Housing

The distinction between conventional and non-conventional housing types primarily lies in their construction methods, foundational permanence, and adherence to specific building codes. Manufactured homes are constructed in a factory setting under federal Department of Housing and Urban Development (HUD) code standards, then transported to a site. Unlike conventional homes, manufactured homes may not always be placed on a permanent foundation, and their titling can differ, sometimes being classified as personal property rather than real estate.

Modular homes are factory-built in sections but are assembled on a permanent foundation at the site, making them eligible for traditional financing if they meet local codes. Their permanent affixation and adherence to local building standards often allow them to be considered conventional for financing. Tiny homes, typically 400 square feet or less, often face challenges qualifying as conventional due to their size, potential mobility, and issues with zoning laws or minimum loan amounts set by lenders. Non-traditional structures like yurts or earth homes generally do not meet conventional criteria due to their unique construction, lack of permanent foundations, or zoning inconsistencies.

Conventional Loans for Conventional Homes

Conventional loans are a common financing option for homes and are not insured or guaranteed by government agencies such as the FHA, VA, or USDA. These loans are offered by private lenders and conform to guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac. To qualify for a conventional loan, lenders require a minimum credit score of 620, though higher scores can lead to more favorable interest rates. Borrowers also need to meet debt-to-income (DTI) ratio requirements, where lenders prefer a total DTI of 36% or less, though some may approve ratios up to 45%.

Down payment requirements for conventional loans can be as low as 3% for eligible borrowers, especially first-time homebuyers, but a 20% down payment is often recommended to avoid private mortgage insurance (PMI). PMI is required when the down payment is less than 20% of the home’s value, protecting the lender in case of default. This insurance can be canceled once the borrower reaches 20% equity in the home. Conventional loans are used for properties that meet the characteristics of conventional housing due to the property’s marketability and adherence to established standards. While some manufactured homes can qualify for conventional loans if permanently affixed and titled as real estate, non-conventional housing types often require specialized financing due to their differing characteristics and perceived risk.