Last update : Dec 17, 2022
A conventional loan, generally speaking, is a mortgage loan that is not offered or secured by the federal government. It’s available through or guaranteed by a private lender or the two government-sponsored enterprises- Fannie Mae and Freddie Mac*. The 30-year fixed-rate conventional mortgages are the most common and are good for people with a great credit score and some money saved for a down payment.
It comes in two categories: Conforming and Non-Conforming; and two types: fixed-rate or adjustable-rate.
Conforming Conventional Loans
– Meets the guideline set by Fannie Mae or Freddie Mac.*
– Conforms to the standards of the Federal Housing Finance Agency (FHFA), including credit, debt, and loan size.
– Under the loan limits: The Federal Housing Finance Agency (FHFA) releases new conforming loan limits every year. The conforming loan limit for 2023 is $726,200 –. The limit is higher in Alaska and Hawaii, the loan limit is $1,089,300 for a 1-unit property.
– Available through different types of mortgage lenders, including banks, credit unions, and online lenders.
Non-Conforming Conventional Loans
– Any mortgage that doesn’t conform to the requirements set forth by Fannie Mae and Freddie Mac. *
– Jumbo loans are non-conforming loans because the loan amount exceeds Fannie Mae and Freddie Mac limits
– Government-backed loans like VA loans, FHA loans, or USDA loans also belong to non-conforming loan categories.
Conventional loans come in two main types: fixed-rate and adjustable-rate. With a fixed-rate mortgage, your interest rate never changes. With an adjustable-rate mortgage, the rate changes with market conditions at predetermined
We will discuss all these types of mortgage loan programs in more detail in their individual section.
General requirements for Conventional loans
Credit Score: Minimum credit score requirement is 620, but with 740+ you can make a lower downpayment and get a better loan rate.
DTI ( Debt to income ratio): Most lenders will not want this ratio to exceed 43%, although some might make an exception and allow up to 50%.*
Your DTI represents the total amount of your existing monthly debts (like rent or car payments) divided by your pre-tax monthly income. Link
Downpayment: min. 3%, but if you have a lower credit score or higher DTI ratio, you will need a larger downpayment.
Private Mortgage Insurance ( PMI ), if your downpayment is less than 20% on a conventional loan you need to get Private Mortgage Insurance. When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments.
Loan Limits: For 2022, the conforming loan limits are $647,200 in most areas. but Fannie Mae and Freddie Mac allow a loan amount of up to $970,800 in certain high-priced ZIP codes. Over this amount, instead of a conventional loan, should apply for a Jumbo loan.
Employment and income requirements
Most lenders require 2 years of documentation to prove consistent income steam.
During the mortgage application process, home buyers must provide proof of income, which may involve some or all of the following documentation:
– 30-day pay stubs
– 2 year’s W2s
– 2 year’s tax returns if self-employed
– Alimony and child support can also be counted if documented in a divorce decree or court-ordered document, along with the recurring method of payment such as an automatic deposit and proof of the continuance.
– Seasonal income is also accepted with proof in a tax return.
Who are the candidates?
Any borrower with a good credit score, no recent foreclosure or bankruptcy history, and a solid financial footing for a down payment will satisfy conventional loan qualification requirements.
Conventional mortgage loans are more accessible to those with middle-to-high income, and with their favorable financial profiles can secure a lower interest rate.
Advantages of conventional loans
Compared with government-backed loans, qualifying for a conventional mortgage may be tougher, but a conventional loan can be a good option for many home buyers.
More property types: Conventional loans are not only for a primary residence, al; so can be used for a second home or an investment property. While government-backed mortgage programs (VA loans, FHA loans, or USDA loans) tend to come with the owner-occupied requirement ( primary residence).
Cancellable PMI Private Mortgage Insurance*: If your down payment on a conventional loan is less than 20%, you’ll have to get private mortgage insurance. After your principal loan balance drops to 78% of the home’s value, you can ask to cancel your PMI.
On the other hand, if you had a 30-year FHA loan, you’d be paying those insurance premiums for the life of the loan, unless you sell the home or refinance into a conventional loan.
Low Cost: A higher credit score can help you qualify for a lower interest rate.
Higher loan limits with Jumbo Loan: While conforming conventional loans do have limits, you can go even higher with jumbo conventional loans if you need to. Government-insured loans do not offer this kind of flexibility.
No program-specific fees: As with all the loan programs, you have to pay fees to the lender, but, conventional loans don’t have the additional program-specific costs as government-backed loans. For example, with an FHA loan, you’ll pay a 1.75% upfront mortgage insurance premium; VA loans have a funding fee of 1.4 to 2.3%, depending on your down payment.
Flexible repayment plans: The 30-year fixed-rate conventional mortgages are the most common, you can find other terms, like 15- or 20-year loans, as well as adjustable-rate mortgages. Since lenders don’t have to follow government-prescribed programs, they can offer more options.
Often preferred by sellers: Conventional loans tend to be more appealing to sellers, especially in a competitive market and can help you get an edge over the competition. Many people heard about government-backed mortgages usually have a lot of paperwork and requirement can fall through, and take longer to close, whether true or not, this can cause sellers to accept a conventional loan purchase offer over a government-backed loan.
Downsides of Conventional Loans
Along with some of the benefits of getting a conventional loan over a government-backed loan, there are also some disadvantages to consider:
Higher credit score requirements: You typically need credit scores of at least 620 to qualify for a conventional loan. Unlike some government-backed loans, such as FHA loans, a 580 credit score with a 3.5% down payment; a 500 credit score with a 10% down payment.
Higher down payment requirements: Some conventional loan programs allow you to put down 3% or even nothing at all if you’re a first-time homebuyer, but others are expected to put min. 5%. In contrast, FHA loans require a minimum down payment of 3.5%, and USDA loans and VA loans have no down payment requirement at all.
Stricter qualifying guidelines: Since conventional loans are not Government-insured mortgages, this means the risk is higher for lenders, so your personal financial situation will be more closely examined.
Want to know if you qualify for a conventional loan? Let’s start here.
