What are Conventional Loans?
Conventional loans are not guaranteed or insured by the U.S. Department of Veterans Affairs (VA) or Federal Housing Administration (FHA). The majority of conforming conventional loans abide by the mortgage guidelines established by the government-sponsored entities known as Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation).
Conventional mortgages with less than 20% down require private mortgage insurance (PMI). Since conventional loans are not insured by the federal government, there is no guarantee for the lender should the borrower default. These loans are considered higher risk for lenders, and generally have more restrictive underwriting guidelines.
Conforming conventional loans:
- Loan amounts up to $647,200
- Credit score affects mortgage interest rate
- No mortgage insurance required with 20% or more down payment
- Can put down as low as 3% (private mortgage insurance required)
- Guidelines differ slightly between Fannie Mae and Freddie Mac
Jumbo conventional loans:
- Loan amounts greater than $647,200 and up
- Credit score affects ability to obtain mortgage
- Jumbo guidelines vary from Fannie Mae and Freddie Mac and are typically stricter
- Can require more documentation
- As low as 20% down
- Most require a manual underwrite, which is the strictest underwriting approach today
A few benefits of a conventional mortgage:
- Credit does not have to be pulled on a disclaiming spouse. FHA loans require the lender to pull the disclaiming spouse's credit and count obligations in the buyer's debt-to-income ratio.
- Conventional loans allow for PMI to be dropped on the date that the mortgage balance reaches: (1) 80% of the current property value, if the seasoning of the mortgage is greater than 5 years, or (2) 75% of the current property value, if the seasoning of the mortgage is between 3 and 5 years. Value must be supported with an appraisal.
- Allows for down payment and closing costs to be gifted by a family member.
- Conventional mortgages offer a loan limit of $647,200.
- As low as 3% down conventional loans.