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A Conventional Loan is simply just a “conforming loan” or a loan that conforms to the credit score and down payment minimums for Fannie Mae or Freddie Mac – government-sponsored entities that buy and sell mortgages. Conventional Loans are not backed by a government agency, and a borrower will need a solid credit score and money for a down payment to qualify.
A Conventional Loan is a great option for a home buyer who does not fall into a specialized category for a government-backed mortgage, like military veterans and active service members or their spouses, low-income individuals living in rural areas, or Native American tribal members. With a Conventional Loan, once a buyer has 20% equity into the home, through a down payment or through regular mortgage payments, mortgage insurance isn’t needed.
The minimum down payment for a Conventional Loan is 3% as a first-time home buyer or a buyer who hasn't owned in three years, or 5% for non-first-time buyers. The down payment could also change if you are purchasing a second home, a multi-family unit or if you are in the market for an adjustable-rate mortgage.
If your down payment is less than 20% of the cost of your home, you will be required to pay for Private Mortgage Insurance (PMI). This protects the lender in case you default on your mortgage. You may cancel your PMI once you reach 20% equity in your home, or your lender will cancel it automatically at 22%.
To qualify for a Conventional Loan, a credit score of at least 620 is typically needed. However, the better your credit score, the lower interest rates you could qualify for, leading to a lower down payment.
Your debt-to-income (DTI) ratio will need to be below 50% for Fannie Mae and below 50.5% for Freddie Mac with a good credit score. A lower credit score will have a DTI cap of 45%.
As a conforming loan, a Conventional Loan will need to fall inside the limits set by Fannie Mae and Freddie Mac. The maximum loan limit changes annually. Outside of high-cost areas of the country like Alaska, Hawaii or California, the current limit for a single-family home is $726,200 in 2023. If the loan you seek is above this, you could qualify for a Jumbo Loan.
No. Conventional Loans cannot be assumed by a buyer. Only government-backed mortgages are assumable, such as FHA Loans or USDA Loans.
Any homeowner can refinance to a Conventional Loan as soon as they meet the conforming loan requirements. By making regular mortgage payments, a homeowner can improve their credit score to an acceptable level while building equity in the home. By refinancing to a Conventional Loan, a homeowner can also rid themselves of their Mortgage Insurance Premium (MIP) that comes with an FHA Loan.
An FHA Loan is a government-backed loan where a homebuyer can make a lower down payment or have a lower credit score and still qualify for a mortgage loan. A Conventional Loan requires a higher credit score and larger down payment. However, a buyer is always required to pay mortgage insurance with an FHA Loan, whereas it may not be necessary with a Conventional Loan, depending on the down payment amount.
A non-Conventional Loan is the same as a non-conforming loan, or a loan that does not follow traditional mortgage loan requirements. Some different types of non-Conventional Loans that Mabrey Bank finances include Jumbo Loans, VA Loans, FHA Loans, USDA Loans and HUD 184 Loans.
An appraisal is likely required to determine and/or verify the property’s value compared to similar, recently sold homes in the area as well as the general condition of the property. An appraiser will not inspect the home in detail, that would be done during a home inspection. While a home inspection is not a requirement of a conventional loan and is the home buyer’s responsibility, it is often recommended.
If you are buying a home, closing costs must be paid on the day the loan is closed and cannot be rolled into the loan. If you are refinancing, you can roll some of your closing costs into a Conventional Loan depending on how much equity you have in the home. However, this will mean a higher mortgage payment.
