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What is a Conventional Loan?
A conventional mortgage loan is a loan that meets the requirements for Fannie Mae or Freddie Mac to insure/back. FNMA and FHMC are the two government-sponsored mortgage entities that purchase mortgage loans which in turn allow banks to traditionally offer lower mortgage rates than jumbo loans or non-conventional loans.
Every year these two entities release loan limit guidelines that require mortgage loans to be under a specific loan amount for them to purchase or back. This year, the conventional loan amount limit has been set at $647,200 in most areas across the United States. However, many high-cost areas like Orange County, San Francisco, Santa Barbara and San Diego have higher conventional loan limits up to $970,800 to offset the higher cost of living.
For first-time homebuyers, it is possible to get a conventional mortgage with a down payment as low as just 3% down when buying a primary home. If you're not a first-time homebuyer, a down payment as low as 5% and still be obtained with a conventional mortgage. For borrowers looking to purchase a multi-family home, a 15% down payment is required. If you're purchasing a second home or vacation home you will need at least 10% down and if you're buying an investment property this increases to 15% down.
If you're purchasing a home and putting in less than a 20% down payment you will be required to pay for private mortgage insurance (PMI). Private Mortgage Insurance is placed to protect your mortgage in case you default on your mortgage loan with little equity in the home. For borrowers with good credit, the cost for PMI can be as little as $90 a month on a $300,000 loan with a 5% down payment. PMI is paid monthly as part of your mortgage payment each month but the nice thing about PMI is you will not have to pay it forever. When your property reaches a 20% increase in equity you can get rid of your PMI by either refinancing or contacting your mortgage servicer to see if there are other options available to remove the PMI without needing to refinance. Another option is to pay down your mortgage balance. Once you've paid 22% of the original purchase price your mortgage lender will automatically cancel your PMI as long as a certain time period has passed since you purchased your home.
Credit Score: In most cases, borrowers will need at least a 620 credit score to obtain a conventional mortgage. However, having a higher credit score may provide benefits such as better financing terms.
Your DTI is a percentage that tells a lender how much of your monthly pre-tax income will be used to cover your debts. The debts used to calculate your DTI only include items that are reported on your credit report. Medical bills, cable bills, cell phone bills and other utility bills are not included.
For a conforming conventional loan, your loan must fall within the loan limits set by Fannie Mae and Freddie Mac. The loan limit changes annually and for 2022, the conforming loan limit for a single-family home is $647,200. There are exceptions to the limit. Alaska, Hawaii and other high-cost areas in the country have higher loan limits that range up to $970,800 to make up for the higher cost of living. To find out the loan limits for your prospective area, visit the Federal Housing Finance Agency website.
Conventional loans usually offer the best terms for financing your primary home, second home or investment property. To find out what types of financing you would qualify for click the link below or call us at 844-4MODERN today!
