Conventional Home Loans

What is a Conventional Mortgage?

A conventional mortgage is one that's not guaranteed or insured by the federal government. Instead, they are available through private lenders, such as banks, credit unions, and mortgage companies.

Conventional mortgages have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. This gives homebuyers a sense of stability that is not present in the case of, say, an adjustable-rate mortgage. Interest rates for conventional loans tend to be lower than rates for FHA loans yet higher than those of VA loans.

Conforming conventional loans must fall within the limits set by Fannie Mae and Freddie Mac. If a loan surpasses that limit, it becomes a jumbo (nonconforming) loan. Usually, you'll be able to borrow more money on a conventional loan than on an FHA loan.

Conventional Mortgage Requirements

Documentation Needed

• Proof of income and assets.
• Employment verification.
• A driver's license/state ID card.
• A valid social security number.

Other Requirements

• Have a FICO credit score of at least 620 (may vary by lender).
• Make a down payment.
• Have a debt-to-income (DTI) ratio of less than 50%.
• In the case of a conforming loan, fall within Fannie Mae/Freddie Mac limits.

Down Payment

The requirement for a down payment can vary based on your personal circumstances and the kind of loan or property you're getting. First-time home buyers may acquire a conventional mortgage with a down payment as low as 3% through financial assistance programs.

• If you're not a first-time home buyer, the down payment requirement is 5%.
• If you're a second-time home buyer, the requirement is 10%.
• With an adjustable rate mortgage, you need to put down at least 5%.
• In the case of a jumbo loan, the down payment requirement ranges from 10% to 40%.
• If you're not buying a single-family home, you may need to put down 15%.

Private Mortgage Insurance

If you choose to make a down payment of less than 20% on a conventional loan, you'll be required to pay for private mortgage insurance (PMI), which protects your lender in case you default on your loan. This is different from FHA loans, where you have to pay an upfront mortgage insurance premium (UFMIP) and an annual MIP.

Your PMI is typically included as part of your monthly mortgage payment, but there are other ways to cover the cost, including as an upfront fee or a slightly higher interest rate. When you reach 20% equity on your home, you can ask your lender to remove the PMI. Once you reach 22% equity, the PMI will automatically be removed.

Different Types of Conventional Mortgages

• Conforming – meets loan standards set by Fannie Mae/Freddie Mac.
• Nonconforming – (like a jumbo loan) doesn't meet Fannie Mae/Freddie Mac standards and often requires a higher credit score.
• Fixed Rate – the interest rate remains the same for the life of the mortgage.
• Adjustable Rate – rates change annually after staying fixed for a set number of years.
• Amortized – a set monthly payment from start to end of the repayment period, with no balloon payment.
• Low Down Payment – down payments as low as 3–5 percent.
• Portfolio – the lender keeps the loan in its own portfolio rather than selling it on the secondary market.
• Renovation – finance a house while also paying for renovations.

Advantages of Getting a Conventional Loan

• Interest rates tend to be lower.
• More options in terms of down payment.
• Very flexible, as they aren't dependent on government insurance approval.
• Fewer stipulations on the property types you can buy.
• Can be used on a second property or investment property.
• PMI is typically dismissed once you reach 20% equity.