If you’re been shopping around for a new house and looking for a mortgage to help make ends meet, you’ve probably heard a bunch of different terms thrown around. Odds are, you’ve probably heard of a conventional loan, but what exactly is this sort of loan?
A conventional loan is a mortgage that is not backed by any Government agency, such as the Federal Housing Administration (FHA) or Veterans Administration (VA). Conventional loans meet the lending requirements of Freddie Mac and Fannie Mae, the two largest buyers of mortgage loans in the country. Most conventional mortgages are issued by private lenders who then sell the loan to one of these Government Sponsored Entities (GSE’s).
Here are a few Conventional Loan Requirements:
● Credit: The minimum credit score requirement is typically between 620-640 depending on the lender.
● Income: Income will be verified by reviewing recent paycheck stubs, tax returns and W2s. Debt-to-income ratio must not exceed 43%.
● Occupancy: Conventional loans can be used to finance a primary residence, a second home, vacation property or a rental property. This contrasts with government-backed loan programs which can only be used to finance a primary residence.
● Assets: Bank and investment statements will be verified to ensure the borrower has sufficient assets to close. These funds must be able to cover a down payment plus associated closing costs.
● Property Type: Single-family homes, duplexes, 2-4-unit properties, condominiums and townhouses are eligible.
Conventional Loan Pros
● Higher loan limits than FHA
● Adjustable-rate and fixed-rate loan terms available
● No private mortgage insurance (PMI) with 80% loan-to-value ratio
● Available for second homes and investment properties
● PMI cancels when the LTV reaches 78%
● Lower PMI rates than FHA Conventional 97 with 3% down
Conventional Loan Cons
● Credit score requirement is higher than FHA (minimum 620-640)
● Higher down payment requirement (5%-20%)
● Qualifying guidelines are more strict
● Low income borrowers may not qualify
A conventional loan may be a good fit for you if you…
● Have a minimum Fico credit score of 620
● Have a 20% down payment
● Want to avoid PMI by putting at least 20% down
● Have a high income (low debt-to-income ratio)
● Need a loan amount that is above the FHA loan limit
Down Payment Guidelines
There are no standard down payment guidelines for conventional financing. The minimum down payment is usually between 5% – 20% of the sales price.
The conventional 97 loan offers 97% financing, requiring just a 3% down payment.
Conventional mortgage loans with less than a 20% down payment and the mortgage is greater than 80% of the value of the home a private mortgage insurance policy is required.
A private mortgage insurance policy, or PMI, is an insurance policy that compensates the lender the difference between the 80% threshold and the amount of down payment should the loan ever go into default.
Conventional vs FHA Loans
FHA Loan Advantages
● Easier to qualify for because of their low credit score and down payment requirements
● Require just a 3.5% down payment making them an attractive option for first-time home buyers
● Borrowers with a 580-credit score may qualify with just a 3.5% down payment
● Higher DTI ratios accepted making them better for low-income borrowers
FHA Loan Disadvantages
● FHA loans require mortgage insurance regardless of the down payment
● In some cases, PMI is required for the life of the loan
● Limited to buying only homes that are approved for an FHA loan
● Properties in need of repair will not qualify
● May have higher interest rates
Conventional Loan Limits
Conventional loan limit in low-cost areas is $453,100
Conventional loan limit in high-cost areas is $679,650
For a list of the maximum loan limit in your area click here.
If you think you’re ready to apply for a mortgage, please reach out to us and we will help you get started!