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Understanding Conventional Loans and How They Work 

Conventional Loans

Standard Variable Rate (SVR) loans mostly known as conventional loans are a great choice for homebuyers as they meet their specific financial criteria.  

A conventional loan is a type of loan that is offered by private lenders including banks & credit unions and not backed up by the government. They provide attractive interest rates and a range of loan term choices, which makes them appealing to eligible borrowers. These loans either have a fixed interest rate or are adjustable offering the borrower a sense of flexibility.

How do conventional loans work and what are the requirements?

Like in other countries, conventional loans work the same in Australia. You borrow a sum of money from the lender to purchase a residential property and as per the terms you pay back to them in a certain period. 

However, here are some key requirements for obtaining conventional loans:

Down payment 

To apply for this type of loan, in Australia, one must deposit between 5% and 20% of the purchase price of the property. In the case of borrower failure, Lender’s Mortgage Insurance (LMI), safeguards the lenders by making them feel safe. Therefore, the lenders require LMI on the condition that deposits are under 20%. By removing the requirement for LMI, a 20% deposit can help to reduce monthly costs.

Credit score 

To ensure one’s creditworthiness, lenders prefer to know the credit score of each individual. This is an important requirement because based on this lenders decide whether one is capable of repayment or not. 

A minimum credit score of 620 is a must to be qualified for a conventional loan.  However, one can take advantage of more favourable interest rates if they have a score higher than 700 or above.

Property valuation

In order to determine the loan amount, the lender first requests the borrower’s property valuation. This not only satisfies the requirements of the lender but also makes the process smoother.

Debt-to-Income (DTI) Ratio

Although conventional loans in Australia do not have a specific DTI ratio limit, lenders frequently favour borrowers with a DTI ratio below 43%. This ratio indicates how much of a borrower’s income is committed to paying down outstanding debts and assists lenders in determining affordability.

Income stability 

When evaluating a home loan application, the lender checks your income reports. This is to check the consistency and reliability of your income over time. They want to ensure that you have a steady income source or not to meet the monthly payments.

Therefore, conventional home loans offer a flexible and reliable way to finance your home. To make informed decisions regarding homeownership it is crucial to understand the requirements and benefits.  If you’re ready to take the step, contact Sapphire Real Estate today to connect with experienced professionals who can guide you through the entire process. 

Disclaimer



This information is for general informational purposes only and is not intended as professional advice. While we strive to present accurate and up-to-date information, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the content provided.



Real estate transactions and financial decisions involve complex considerations that may vary based on individual circumstances. Do not consider the content provided as a substitute for professional advice tailored to your specific situation.



Conducting thorough research and consulting with licenced and experienced professionals in the relevant fields is crucial. Every individual’s financial and real estate situation is unique, and professional advice is essential to making informed decisions.

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