Conventional Mortgages

What is a Conventional Mortgage?

Conventional mortgages are not insured or guaranteed by a government agency. This type of home loan typically meets the income and down payment requirements put in place by Freddie Mac and Fannie Mae. Conforming conventional loans must fall within the limits set by Fannie Mae and Freddie Mac. If the loan surpasses that limit, it becomes a jumbo (nonconforming) loan. Usually, you’ll be able to borrow more money on a conventional loan than on a FHA loan.

Different Types of Conventional Mortgages

Conforming – meets loan standards set by Fannie Mae/Freddie Mac. For clarification: the FNMA (Fannie Mae) and the FHLMC (Freddie Mac) are home mortgage companies created by the U.S. Congress. They make the mortgage market more affordable and stable, and they provide liquidity to thousands of loans, banks, and mortgage companies in America.
Nonconforming – (like a jumbo loan, for example) doesn’t meet the loan standards set by Fannie Mae/Freddie Mac. Oftentimes, jumbo loans require a higher credit score than conforming ones do.
Fixed Rate – for as long as you have the mortgage, the interest rate will remain the same.
Adjustable Rate – (also referred to as hybrid ARMs) rates change annually, after staying fixed for a set amount of years.

Private Mortgage Insurance

If you choose to make a down payment of less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI), which protects your lender in case you default on your loan. This is different from FHA loans, where you have to pay an upfront mortgage insurance premium (UFMIP) and an annual MIP.

Your PMI is typically included as part of your monthly mortgage payment, When you reach 20% equity on your home, you can ask your lender to remove the PMI from your mortgage payments. Once you reach 22% equity, though, the PMI will automatically be removed.

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Conventional Mortgage Requirements

Documentation Needed to Get a Conventional Mortgage

Proof of income and assets.
Employment verification.
A driver’s license/state ID card.
A valid social security number.

Other Requirements

Have a FICO credit score of at least 620 (this number may vary from lender to lender).
Have a debt-to-income (DTI) ratio of less than 50%. This means that your total monthly debt payments can’t be more than 50% of your pretax income (includes debts that you aren’t actively paying).
In the case of a conforming conventional loan, your loan must fall within the limits set by Fannie Mae and Freddie Mac.

Down Payment

The requirement for a down payment can vary based on your personal circumstances and the kind of loan or property you’re getting. First-time home buyers have the possibility of acquiring a conventional mortgage with a down payment as low as 3%.

If you’re not a first-time home buyer, the down payment requirement is 5%.
If you are buying an investment property, the requirement is typically 15% to 20%.