Conventional Loans

Conventional Loans

What Is A Conventional Loan?

A conventional mortgage loan is one that’s not guaranteed or insured by the federal government. Most conventional mortgage loans, aka conventional mortgages, are “conforming,” which simply means that they meet the requirements to be sold to Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase mortgages from lenders and sell them to investors. This frees up lenders’ funds so they can get more qualified buyers into homes.

 

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Conventional mortgages can also be non-conforming, which means that they don’t meet Fannie Mae’s or Freddie Mac’s guidelines. One type of non-conforming conventional mortgage is a jumbo loan, which is a mortgage that exceeds conforming loan limits.

Because there are several different sets of guidelines that fall under the umbrella of “conventional loans,” there’s no single set of requirements for borrowers. However, in general, conventional loans have stricter credit requirements than government-backed loans like FHA loans. In most cases, you’ll need a credit score of at least 620 and a debt-to-income ratio of 50% or less.

Conventional Loan Requirements

Down Payment

It’s possible for first-time home buyers to get a conventional mortgage with a lower down payment; however, the down payment requirement can vary based on your personal situation and the type of loan or property you’re getting:

  • If you’re not a first-time home buyer or making not more than 80% of the median income in your area, the down payment requirement is 5%.
  • If the home you’re buying is not a single-family home (i.e., it has more than one unit), you may need to put down 15%.
  • If you’re buying a second home, you’ll need to put at least 10% down.
  • If you’re getting an adjustable-rate mortgage, the down payment requirement is 5%.
  • If you’re getting a jumbo loan, the down payment requirement ranges from 20% – 40%.

If you’re refinancing, you’ll need more than 3% equity. In all cases, you’ll need at least 5% equity. If you’re doing a cash-out refinance, you’ll need to leave at least 20% equity in the home. When refinancing a jumbo loan, you'll need 10.01 – 25% equity, depending on the loan amount.

 

A mortgage calculator can help you figure out how your down payment amount will affect your future monthly payments.

Private Mortgage Insurance

If you put down less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI). PMI protects your lender in case you default on your loan. The cost for PMI varies based on your loan type, your credit score and the size of your down payment

PMI is usually paid as part of your monthly mortgage payment, but there are other ways to cover the cost as well. Some buyers pay it as an upfront fee. Others pay it in the form of a slightly higher interest rate. Choosing how to pay for PMI is a matter of running the numbers to figure out which option is cheapest for you.

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The nice thing about PMI is that it won’t be part of your loan forever – that is, you won’t have to refinance to get rid of it. When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments

If you reach 20% equity as a result of your home increasing in value, you can contact your lender for a new appraisal so they can use the new value to recalculate your PMI requirement. Once you reach 22% equity in the home, your lender will automatically remove PMI from your loan.

Other Requirements

  • Credit score: In most cases, you’ll need a credit score of at least 620 to qualify for a conventional loan.
  • Debt-to-income ratio: Your debt-to-income ratio (DTI) is a percentage that represents how much of your monthly income goes to pay off debts. You can calculate your DTI by adding up the minimum monthly payments on all your debts (like student loans, auto loans and credit cards) and dividing it by your gross monthly income. For most conventional loans, your DTI must be 50% or lower.
  • Loan size: 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. In 2020, the limit was $510,400. In 2021, it's $548,250.

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Licensing

BUYorREFI Financial (NMLS 1838307)
(MB1000724)
Rhett Laufenburger NMLS# 221295

Contact Us

BUYorREFI Financial
14780 W Mountain View Blvd
Suite #206
Surprise, AZ 85374

Number:
(480) 225-6699

Hours:
MON-FRI 9AM - 5PM
SAT-SUN By Appointment only

BUYorREFI Financial 14780 W Mountain View Blvd Surprise AZ 85374 (NMLS # 1838307). 480-225-6699. Copyright © 2021 BUYorREFI Financial. All Rights Reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. Not all products are available in all states or for all loan amounts. Other restrictions and limitations apply. BUYorREFI Financial is an independent mortgage broker and is not affiliated with the Department of Housing and Urban Development or the Federal Housing Administration. MB-1000724