What Is a Conventional Mortgage or Loan?
A conventional mortgage or conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity. Instead, conventional mortgages are available through private lenders, such as banks, credit unions, and mortgage companies. However, some conventional mortgages can be guaranteed by two government-sponsored enterprises; the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Conventional mortgages often meet the down payment and income requirements set by Fannie Mae and Freddie Mac, and they often conform to the loan limits set by the Federal Housing Finance Administration (FHFA). Conventional loan borrowers who put at least 20% down don’t have to pay for mortgage insurance, which is typically required with lower down payments or government-backed loans.
Credit Scores for Conventional Home Loans
Requirements vary from lender to lender, but 620 is typically the minimum credit score needed to obtain a conventional loan, and 740 is the minimum score you need to get a good mortgage rate. The term of a conventional mortgage is usually 15, 20 or 30 years.
Minimum Down Payment on a Conventional Loan
A conventional mortgage can require a sizable down payment in comparison to other types of mortgage loans. Conventional lenders have traditionally required up to 20% for a down payment, but now they can offer a 3% down payment program to compete with the 3.5% minimum down payment option for an FHA loan. Down payment requirements can vary based on the lender as well as the borrower’s credit history.
No property is ever 100% financed. In checking your assets and liabilities, a lender is looking to see not only if you can afford your monthly mortgage payments, which usually shouldn’t exceed 28% of your gross income.
The lender is also looking to see if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage. Among the items required are:
1. Proof of Income.
These documents will include but may not be limited to:
- Thirty days of pay stubs that show income as well as year-to-date income
- Two years of federal tax returns
- Sixty days or a quarterly statement of all asset accounts, including your checking, savings, and any investment accounts
- Two years of W-2 statements
- Borrowers also need to be prepared with proof of any additional income, such as alimony or bonuses.
You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need gift letters, which certify that these are not loans and have no required or obligatory repayment. These letters will often need to be notarized.
3. Employment Verification
Lenders today want to make sure they are loaning only to borrowers with a stable work history. Your lender will not only want to see your pay stubs but may also call your employer to verify that you are still employed and to check your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
In addition to the down payment, borrowers are often responsible for origination fees, mortgage insurance and appraisal fees. As such, conventional loans tend to have a higher out-of-pocket cost at closing than other types of mortgage loans.
4. Other Documentation
Your lender will need to copy your driver’s license or state ID card and will need your Social Security number and your signature, allowing the lender to pull your credit report.
Conventional Conforming and Nonconforming
Conventional mortgages fall into two categories: “Conforming” and “Nonconforming” loans.
Conforming loans follow the guidelines set by Fannie Mae and Freddie Mac, two government-controlled companies that provide money for the U.S. housing market. The most well-known rule has to do with the size of the loan. In 2020, the conforming loan limit for single-family homes in most of the continental U.S. is $510,400. Higher-cost areas, such as Hawaii and Alaska, have higher limits up to $765,600 for single-family homes.
Nonconforming loans, often called Jumbo Loans, are for borrowers who don’t qualify for a conforming loan because the amount is higher than the conforming limit for the area. Because they don’t conform to the guidelines, jumbo loans are usually harder to sell on the secondary market (when lenders sell their loans to other institutions), making them less attractive to lenders. And the higher amount of money involved also means more risk for the lender.
Special Considerations for a Conventional Mortgage or Loan
These types of loans are not for everyone. Here’s a look at who is likely to qualify for a conventional mortgage and who is not.
Who May Qualify
People with established credit and stellar credit reports who are on a solid financial footing usually qualify for conventional mortgages. More specifically, the ideal candidate should have:
A credit score is a numerical representation of a borrower’s ability to pay back a loan. Credit scores include a borrower’s credit history and the number of late payments. A credit score of at least 680 and, preferably, well over 700 can be required for approval. Also, the higher the score, the lower the interest rate on the loan, with the best terms being reserved for those over 740.
An acceptable debt-to-income ratio (DTI). This is the sum of your monthly debt payments, such as credit cards and loan payments, compared to your monthly income. Ideally, the debt-to-income ratio should be around 36% and no more than 43%. In other words, you should spend less than 36% of your monthly income on debt payments.6
A down payment of at least 20% of the home’s purchase price readily available. Lenders can and do accept less, but if they do, they often require that borrowers take out private mortgage insurance and pay its premiums monthly until they achieve at least 20% equity in the house.
In addition, conventional mortgages are often the best or only recourse for homebuyers who want the residence for investment purposes, as a second home, or who want to purchase a property priced over $500,000.
It’s a common myth that you need a 20 percent down payment for a conventional loan; you can actually get one with as little as 3 percent down. All told, there are six major options for conventional loan down payments, ranging from 3-20 percent.
- Conventional 97 loan — 3% down
- Fannie Mae HomeReady loan — 3% down
- Freddie Mac Home Possible loan — 3% down
- Conventional loan with PMI — 5% down
- Piggyback loan (no PMI) — 10% down
- Conventional loan without PMI — 20% down
Conventional loans are an excellent option for borrowers with strong credit who can contribute a down payment of at least 3%, or perhaps quite a bit more. Check your conventional loan eligibility and rates today, or see if another loan type is better for you. How?.. Contating us now: Contact@MaraidLending.com
In this process you do not have to be alone. We are here to help you.