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Conventional Mortgages: What You Need to Know

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Prospective borrowers with good credit and a debt-to-income ratio not exceeding 43% of gross income are often looking for a conventional mortgage.


What is a Conventional Mortgage?

Also known as conforming mortgages or high-balance loans, conventional mortgages are the most popular choice among consumers.
Conventional loans conform to the guidelines set by Fannie Mae and Freddie Mac. They offer 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.

Mortgage insurance for conventional loans is more favorable for the borrower compared to other types of mortgages. Mortgage insurance gets removed upon reaching 78% loan-to-value (LTV) on the loan. This is unlike FHA loans, which in most cases carry insurance for the life of the loan. If a borrower makes a down payment of more than 10% of the purchase price, insurance is still required for at least 11 years.

Eligibility

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:

 

Property Type Conforming Loan Limit High Balance Limit
1-Family, Condominium, Co-op $510,400 $765,600
2-Family $653,550 $980,325
3-Family $789,500 $1,185,925
4-Family $981,700 $1,472,550

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 lowest credit requirement is usually a score of 620. The borrowers’ debt-to-income ratio should not be higher than 43%. Down payments must be at least 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.

Applicants on the lower end of the requirements should expect higher monthly payments and more costly mortgage insurance.

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

Do you meet the requirements for conventional mortgage products?


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Down Payments

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. Large down payments enable lenders to be more flexible with their underwriting.

Insurance

Private Mortgage Insurance, or PMI, is required for all conventional loans with a down payment of less than 20%. PMI is determined by credit scores and loan-to-value. Insurance gets removed once the LTV drops to 78%. You can ask your lender to remove your PMI when you reach 80%.

 

Second Homes & Investment Properties

Conventional mortgages are popular among borrowers looking to purchase a second home or investment property. These types of conventional loans come with higher lending standards as opposed to mortgages on primary residences. A second home is a property that the owner occupies for less than 6 months a year. Investment properties are never occupied by the owner.

 

Fees and Closing Costs

Fees and closing costs get 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 this article to learn more about what a refinance is.


How do I apply?

If this type of financing fits your needs, start the application process by submitting your scenario below:

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