What is a conventional mortgage?
A conventional mortgage is any mortgage that is backed up by Fannie Mae or Freddie Mac. These companies (Fannie Mae & Freddie Mac) stand behind and guarantee the mortgage. Unlike FHA and VA mortgages, conventional mortgages are not backed by the government. These are the most popular type of mortgage (around 40% of all mortgages are conventional).
CONVENTIONAL LOANS ARE NOW AVAILABLE UP TO $453,000
CREDIT SCORES MUST BE 640 WITH UP TO 20% DOWN PAYMENT.
What is different about a conventional mortgage?
A conventional mortgage has certain guidelines that it must meet. These guidelines are set by Fannie Mae and Freddie mac. If the mortgage does not meet those guidelines, it cannot be backed by them. These guidelines include
- Loan limit of $453,000 (Alaska, Guam, Hawaii, Us Virgin Islands $625,000)
- Private Mortgage Insurance (PMI) is required if you put down less than 20%
- Minimum down payment of 5% for a Conventional Loan on a Primary or Second Home.
A conventional home loan has a lower debt to income ratio allowed than FHA. The total debt ratio limit is up to 50% with up to 20% down payment. (FHA can go up to 55% and sometimes higher).
Requirements for a conventional mortgage
What kind of credit do I need for a conventional loan?
You will need to have strong credit for a conventional mortgage. The minimum is usually 640. Most companies may expect higher. The best interest rates (the ones you see advertised) are reserved for those with a credit score of 720+. If you do not have a 640 credit score, an FHA or VA mortgage could be a much better solution.
How much of a down payment will I need?
You will need to put down at least 5% (and often you will need to put down more than this) in order to use a conventional mortgage. The funds may not be a gift for this type of loan. You will need to put down 20% in order to not pay Private Mortgage Insurance.
Why would I want to go with a conventional mortgage?
A conventional mortgage is a great product if you have pristine credit and a large down payment. The fact that you will not have to pay Private Mortgage Insurance is a large money saver (often around $200 per month). If you do not have great credit, a large down payment, or a combination of the two, a conventional mortgage is not the best product for you.