If you’re shopping for a mortgage you have probably heard about conventional loans.
But what exactly is a conventional loan and how do you know if it’s the right type of mortgage for you?
In this article we are going to break down conventional loans and go over the pros and cons of conventional mortgage loans vs other types of home loan programs.
What is a Conventional Loan?
A conventional loan is a mortgage that is not backed by any Government agency such as the Federal Housing Administration. The lender issuing the loan is assuming the risk.
Conventional loans also meet the requirements of Fannie Mae and Freddie Mac. Most conventional loans are issued by private lenders who then sell the loan to one of these Government Sponsored Entities (GSE’s).
Conventional Loan Highlights
- Conventional loans come with Fixed rates or an Adjustable rate.
- Conventional loans can be used to purchase a primary residence or investment property.
- Down payment typically of 5% – 20%
- Conventional 97 has a 3% down payment
- 620 Credit score minimum
- PMI required for loans with under 80% LTV
A conventional loan may be a good fit for you if…
- Your credit score is 640 or higher
- Have a down payment of 10%+
- Want to avoid PMI by putting at least 20% down
- Have a high income
- Purchasing a home above the FHA loan limit
Conventional Loan Down Payment
There are no standard requirements for conventional loans. The minimum down payment for a conforming loan is usually 5% of the sales price. A conventional 97 loan has just a 3% down payment. Conventional loans with less than a 20% down payment and the mortgage is greater than 80% of the value of the home a private mortgage insurance policy is required.
A private mortgage insurance policy, or PMI, is an insurance policy that compensates the lender the difference between the 80% threshold and the amount of down payment should the loan ever go into default.
Conventional Loans vs FHA Loans
There are several key differences when comparing FHA and conventional mortgages. For one, FHA loans are easier to qualify for because of their low credit score and down payment requirements.
FHA loans require just a 3.5% down payment making them an attractive option for first time home buyers and any buyer without a 20% down payment.
FHA loans require mortgage insurance regardless of the down payment. Conventional loans allow you to avoid paying PMI if you have at least a 20% down payment, making conventional loans more attractive to borrowers with higher down payments.
Conventional Mortgage Benefits
- High loan limits (up to $424,100)
- No private mortgage insurance (PMI) with 20% down
- Available for second homes and investment properties
- PMI cancels when the LTV reaches 78%
- Cheaper PMI than FHA
- Conventional 97 with 3% down
Conventional Mortgage Disadvantages
- Credit score requirement is higher than FHA (620+)
- Higher down payment required compared to FHA (5%-20%)
- Higher interest rates
- More difficult to qualify for
Conforming vs Non-Conforming Loans
Conforming loans are conventional loans are those that are underwritten to standards issued by mortgage giants Fannie Mae and Freddie Mac and make up more than half of all mortgages issued today.
Fannie and Freddie have set forth specific lending guidelines that lenders can follow allowing the lender to sell a conforming loan to other conforming lenders or directly to Fannie Mae and Freddie Mac.
Selling a loan fees up additional capital by replenishing a lender’s credit line allowing the lender to make more home loans.
Borrowers who do not qualify for conforming loans are offered non-conforming loans. This type of conventional loan has higher interest rates and lender fees. The most popular type of non-conforming loan is a jumbo loan. The main difference in non-conforming and conforming loans is the loan amount.
Conventional Loan Limits
If you’re buying a home in 2017 and your loan amount is at or below $424,100 and you meet the guidelines established by Fannie and Freddie you’re likely to end up with this mortgage type. The maximum loan amount for both Fannie and Freddie is at this $424,100 mark.
Because most loans issued today are approved using these standards you’ll find some very competitive interest rates as mortgage companies compete against one another to get your conforming business. Beyond the maximum loan amount of $424,100, there are some additional guidelines:
Conventional Loan Requirements
Credit- A mortgage lender will order a credit report from the three main credit agencies, Equifax, Experian and TransUnion. In addition to the report lenders will also request a credit score from each. This score is a three digit number ranging from 300 to 850. The minimum credit score for conventional loans is typically 620 or better although lenders can require a slightly higher score.
Occupancy- Conventional loans can be used to finance a primary residence, a second home or vacation property or a rental property. This is in contrast to government-backed loan programs which can only be used to finance a primary residence.
Property Type- Conventional loans can be used to finance a single family residence, a duplex, 2-4 unit property and a condominium.
Income- Income for conventional loans is primarily verified by reviewing recent pay check stubs and W2s. Most lenders ask that total monthly credit obligations not exceed 43 percent of gross monthly income.
Assets- Lenders will also review bank and investment statements verifying the borrowers have sufficient cash to close. These funds must be able to cover a down payment plus associated closing costs.
There are many different types of mortgage loans available in 2017. Choosing the right one for you is something you will need to speak to a loan officer about. If you have a credit score above 620 and have a large down payment then a conventional loan may be right for you.
The minimum credit score for conventional loans is 620 for conforming loans, 700 for non-conforming and jumbo loans. If you are interested in seeing if you qualify please fill out the convenient form on our website.