Conventional Loans

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The conventional mortgage most people think of is the “Conforming” loan that meets the requirements of Freddie Mac and Fannie Mae (they are government sponsored and by loans from lenders and then sell to investors). Conventional loans have a maximum loan amount of $726,200 for most areas (Hawaii, Alaska and a few high cost markets have higher maximum rates).

Conventional loans typically require a down-payment that can be as low as 3% to 5% for a Primary Residence. If putting down less than 20% then borrowers will be required to pay private mortgage insurance (PMI).

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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 $726,200.  Over that Amount the loan is a Jumbo Loan which is available with 10% Down Payment
  • Private Mortgage Insurance (PMI) is required with less than 20% Down
  • Minimum Down Payment of Only 3% on a Primary Home but Higher Down Payments Will Have Better Interest Rates
  • Credit Scores from 640 are Accepted but the Interest Rates are Determined by the Down Payment and Scores.  Lower Scores will Have Higher Rates
  • For Investment Properties - 20% Down is Required

A Conventional Home Loan has a Lower Debt to Income Ratio Allowed than FHA. The total debt ratio limit for a Conventional or Jumbo Loan is 50% with as little as 3% down payment. (FHA can go up to 55% and sometimes higher).

Requirements for a conventional mortgage

You should have stronger credit for a conventional mortgage. The minimum is usually 640 for a Primary Purchase and higher for Cash Out refinances. With under 680 credit scores the interest rates will be 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.

Why would I want to go with a Conventional Mortgage?

A conventional mortgage is a great product if you have Very Good Credit and a Larger Down Payment. The fact that you will not have to pay Private Mortgage Insurance is a large money saver (often around $200 or more 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.

FHA has loan limits in every county and if you are looking for a higher loan amount you might need to do a Conventional Loan.  Conventional Loans with less than 20% have monthly private mortgage insurance payments but once you have 20% equity in the property you can request for the lender to drop the PMI payment.  With FHA you do not have that option.

Conventional Loan Overview

  • Primary, Second/Vacation homes and Investment Properties are eligible for financing
  • Renovation Loans are available for home improvements and additions or swimming pools
  • Cash Out refinancing is available up to 80% of the appraised value with approved credit