Prospective borrowers with good credit and a debt-to-income ratio not exceeding 43% of gross income are often looking for a conventional mortgage. The term has been heard by most; these are typically the types of loans that people think about when conceptualizing a future purchase. We intend to break down the pertinent details of these loans with the hope that you will be able to make a more informed decision when the time comes.
What is a Conventional Mortgage?
Also known as conforming mortgages or high balance loans, conventional mortgages are consistently the most popular choice among consumers. 76% of all loans closed in March of this year were conventional, according to the most recent Ellie Mae Origination Insight Report. Conventional loans conform to the guidelines set by Fannie Mae and Freddie Mac. In turn, these loans offering competitive rates, low closing costs, as well as financing for second homes, investment properties, co-ops, and condominiums.
Benefits of a Conventional Mortgage
Conventional loan programs offer increased flexibility compared to government-backed mortgages, making them more consumer-friendly.
These mortgages can be used in a variety of transactions. Besides purchasing a primary residence, conventional mortgages can be used for second homes and investment properties.
Mortgage insurance for conventional loans is typically in the borrowers’ favor compared to other types of mortgages. It is canceled automatically upon reaching 78% loan-to-value (LTV) on the loan. FHA loans on the other hand typically carry insurance for the life of the loan. If a borrower makes a down payment of more than 10% of the purchase price, insurance will still be required for at least 11 years.
Do you meet the requirements for conventional mortgage products? Take a look at our rates today.
There are a variety of different property types that qualify for conventional mortgages. These include single-family detached homes and 2-4 unit properties.
Condominiums and co-ops are eligible also, so long as they meet the lenders’ property standards.
The following table outlines the loan limit criteria for each property type:
||Conforming Loan Limit
||High Balance Limit
|1-Family, Condominium, Co-op
Conventional Mortgage Requirements
While certain requirements to qualify for conventional mortgages are at the discretion of the lender, there are certain guidelines set by Fannie Mae and Freddie Mac that all lenders have to abide by. These requirements include benchmarks for credit scores, debt-to-income ratios, and down payment minimums.
The minimum credit requirement is usually a score of 620 and the borrowers’ debt-to-income ratio should not be higher than 43%. Furthermore, down payments must meet a minimum of 3% of the total loan amount or have a loan-to-value ratio of 97%. These are the typical requirements for a single-family home.
If a prospective borrower is on the lower end of the requirements for the credit score and debt-to-income ratio, higher monthly payments and more costly mortgage insurance should be expected.
When applying for a conventional mortgage, the applicant will most likely need to submit the following documentation:
Bank statements going back 60 days
Pay stubs going back 30 days
Last 2 W2’s
Social security, retirement, pension, and 1099 from the previous 2 years
Last 2 tax returns if self-employed, have rental properties, or nonsalaried income
Getting a Pre-Approval Letter will require the documents listed above, in return giving the borrower a competitive advantage over other shoppers without one and a quicker path to financing. Click here to get a free Pre-Approval Letter.
Conventional loans allow for down payments as low as 3% of the purchase price. The payment put down by the borrower will reflect in their monthly payments. The larger the down payment made by the borrower, the lower the monthly payment. Down payments and interest rates are also correlated. Substantial down payments enable lenders to be more flexible with their underwriting.
Private Mortgage Insurance, or PMI, is required for all conventional loans with a down payment of less than 20%. PMI is largely determined by credit scores and loan-to-value. Insurance can be canceled once the LTV drops below 80%.
Second Homes & Investment Properties
Unlike government-insured loans, conventional financing is what enables borrowers to acquire mortgages for second homes and investment properties. These types of conventional loans come with higher lending standards as opposed to mortgages on primary residences. A secondary home is typically defined as a property that the owner occupies for less than 6 months a year. Investment properties are those that are never occupied by the owner, instead of serving as reincurring monthly income and a long term capital appreciation.
Fees and Closing Costs
Fees and closing costs are paid to the lender, title company, appraiser, and escrow for taxes and insurance. Lenders often contribute toward closing costs, easing the burden of the borrower. To attract prospective borrowers, sellers will also help pay closing costs on behalf of the borrower.
First time home buyer? Learn more about closing costs and other mortgage terms you need to know before buying a home.
Refinancing a Conventional Mortgage
Borrowers looking to reduce their interest rate, loan term, or cash out money using the equity of their home do so by refinancing their existing mortgage.
Read our last article on refinancing to help you make a decision.
How do I apply?
If this type of financing fits your needs, contact us today to speak with one of our Mortgage Consultants: