Conventional Loans
Conventional purchase loans are mortgages that are not backed by the government, but instead are backed by private lenders and investors. These loans meet the guidelines set by Fannie Mae and Freddie Mac, which are government-chartered companies that buy mortgages from lenders and guarantee them to investors.
One of the main advantages of conventional loans is that they offer more flexibility than government-backed loans. Conventional loans can be used to purchase primary residences, investment properties, and second homes.
Highlights:
- As Low as 3% Down Payment
- Down Payment Assistance Available (Restrictions Apply)
- 620 Minimum Credit Score
- Loan Terms from 10 to 30 Years
- Down Payment Can be Gifted
- Monthly Mortgage Insurance
- Not Required with 20% or Higher Down Payment
- Automatically Cancels at 80% LTV (Loan-to-Value)
- $766,550 Maximum Loan Amount
Key Features of Conventional Purchase Loans:
- Loan Requirements: Conventional loans typically have stricter qualification criteria compared to government-backed loans. Lenders usually require a higher credit score, a stable income, and a lower debt-to-income ratio to qualify for a conventional loan.
- Loan Limits: Conventional loans have maximum loan limits set by the Federal Housing Finance Agency (FHFA). These limits vary by location and are adjusted annually. Borrowers can typically obtain larger loan amounts with conventional loans compared to government-backed loans, which may be advantageous for purchasing higher-priced properties.
- Down Payment: Conventional loans usually require a higher down payment compared to government-backed loans. While down payment requirements can vary, a down payment of at least 5% to 20% of the purchase price is typical for a conventional loan. However, some lenders offer options for down payments as low as 3% for certain borrowers.
- Private Mortgage Insurance (PMI): If the down payment is less than 20% of the purchase price, lenders generally require the borrower to pay for private mortgage insurance (PMI). PMI protects the lender in case the borrower defaults on the loan. Once the borrower's equity in the home reaches 20% through payments or appreciation, PMI can be canceled.
- Interest Rates: Conventional loans often offer competitive interest rates based on market conditions and the borrower's creditworthiness. Rates can be fixed or adjustable, with fixed rates remaining the same over the loan term and adjustable rates changing periodically.
- Loan Terms: Conventional loans typically offer a variety of loan term options, including 15-year and 30-year fixed-rate mortgages. Shorter loan terms generally come with lower interest rates but higher monthly payments.
It's important to note that guidelines for conventional loans may vary among lenders, so it's advisable to shop around and compare offers from different financial institutions to find the best loan terms and rates that meet your needs. Consulting with a mortgage professional or loan officer can help you navigate the process and determine the most suitable loan option for your specific situation.
Frequently Asked Questions
Conventional loans are mortgages that are not insured or guaranteed by the government. They are offered by private lenders and typically follow guidelines set by entities like Fannie Mae and Freddie Mac.
Conventional loans work like any other mortgage: a borrower applies for a loan from a lender, and if approved, receives funds to purchase or refinance a home. The borrower then repays the loan over time with interest.
There isn't a set limit to the number of conventional loans a borrower can have. However, lenders may have their own policies regarding the number of loans a borrower can have simultaneously.
The maximum debt-to-income (DTI) ratio for conventional loans is typically around 43% to 50%, though some lenders may allow higher ratios under certain circumstances.
Interest rates for conventional loans vary based on factors such as market conditions, the borrower's creditworthiness, and the loan term. It's advisable to shop around and compare rates from different lenders to find the best option.
FHA loans are insured by the Federal Housing Administration and typically require lower down payments and credit scores compared to conventional loans. Conventional loans, on the other hand, are not backed by the government and may have stricter qualification criteria.
Conventional mortgages are offered by private lenders such as banks, credit unions, and mortgage companies. Fannie Mae and Freddie Mac purchase and guarantee many conventional mortgages.
Pros of Conventional Loans:
Higher Loan Limits: Conventional loans often have higher maximum loan limits compared to government-backed loans, allowing borrowers to finance higher-priced properties.
Flexible Terms: Conventional loans offer a variety of loan term options, including 15-year and 30-year fixed-rate mortgages, providing borrowers with flexibility in choosing a repayment plan that suits their financial goals.
No Upfront Mortgage Insurance: Unlike FHA loans, conventional loans typically do not require upfront mortgage insurance premiums, potentially reducing the upfront costs for borrowers.
Cancellation of Mortgage Insurance: With conventional loans, borrowers can request the cancellation of private mortgage insurance (PMI) once their equity in the home reaches 20%, resulting in lower monthly payments.
Cons of Conventional Loans:
Higher Down Payment: Conventional loans often require higher down payments compared to government-backed loans, with down payment requirements typically ranging from 5% to 20% of the purchase price.
Stricter Qualification Requirements: Conventional loans may have stricter qualification criteria, including higher credit score requirements, lower debt-to-income ratios, and more stringent income verification processes.
Private Mortgage Insurance (PMI): If the down payment is less than 20% of the purchase price, borrowers are usually required to pay for private mortgage insurance (PMI), increasing their monthly mortgage payments.
Potential for Higher Interest Rates: While conventional loans often offer competitive interest rates, borrowers with lower credit scores or smaller down payments may be subject to higher interest rates compared to borrowers with stronger financial profiles.
Less Flexibility for Lower-Income Borrowers: Conventional loans may be less accessible to lower-income borrowers who may struggle to meet the higher down payment and credit score requirements.