A conventional purchase mortgage is one of the most common types of mortgage loans.
Conventional loans can be harder to qualify for because they are not government-insured or guaranteed. However, they do offer a wider range of options for homebuyers and property types.
Conventional purchase loans can be a great option for borrowers with good credit and can contribute at least 3% to a down payment, or more.
What is a conventional mortgage?
The definition of a conventional mortgage is a type of loan that is not backed by (i.e., insured or guaranteed) a government agency like the Federal Housing Administration (FHA), the Veterans Administration (VA), or the U.S. Department of Agriculture (USDA).
Unlike these popular government-backed mortgages, a conventional loan often requires the lender to conform to the down payment and income requirements set by The Federal National Mortgage Association (FNMA or Fannie Mae) and The Federal Home Loan Mortgage (FHLM or Freddie Mac), and loan limits set by The Federal Housing Finance Agency (FHFA).
These types of loans are also sometimes referred to as conforming loans.
Non-conforming mortgage loans, like Jumbo loans and loans made to borrowers with lower credit scores, high debt, or homes with a high loan-to-value ratio are available, but often at a higher interest rate or carry additional fees or insurance requirements.
How does a conventional purchase loan work?
Our first step is to determine if you’re eligible for a conventional mortgage. This guide will help you prepare to qualify and get you connected to one of our professional mortgage loan officers to start the process.
How is your credit score?
Your credit score is a significant factor in determining your eligibility for a conventional purchase mortgage.
You might be familiar with your credit score. This number, ranging from 300-850, is used to indicate creditworthiness. Lenders often look at one or more of these credit scores to determine your purchase loan eligibility and the interest rate you can get for your purchase mortgage.
The higher your score, the easier it is to qualify and the better your interest rate.
Can you contribute a down payment?
Home buyers can get a conventional mortgage with a low down payment.
- First-time home buyers can put down as low as 3%
- If you have purchased before, you can still put down as little as 3 – 5%
- If you’re buying a second home, you will need 10%
- If your property type is other than a single-family home you may need 15% down
As you can see down payments can vary depending on your specific circumstances.
This is why it is always a good idea to discuss your home buying needs with a professional loan officer early in the home buying process.
Private Mortgage Insurance
A conventional mortgage allows for a low down payment, but if you put down less than 20% you’ll be required to pay for Private Mortgage Insurance (PMI). This insures – protects – your lender from any possible default. This PMI payment is typically part of your monthly mortgage payment.
The good news is that this is not with your loan forever. Once you reach 20% equity in your home you can contact your lender and have PMI removed from your loan. This is unlike some government-backed loans, such as an FHA loan, where mortgage insurance is paid for the life of the loan.
Another essential qualifying requirement is your debt-to-income ratio (DTI). Your DTI is the ratio of your total minimum monthly debt divided by your gross monthly income.
In qualifying for your refinance, we will total up your minimum monthly payments for car loans, student loans, credit cards, mortgages, and other recurring debts. The lower your DTI, the easier it is to qualify for a refinance loan.
For a conforming conventional loan, your loan must fall within the limits set by The Federal Housing Finance Agency (FHFA). These limits change annually, but as of 2021 that limit is $548,250 and tends to rise. In specific real estate markets, like Alaska, Hawaii, California, and other high-cost areas these limits may be higher. You can see all of these loan limits on The Federal Housing Finance Agency website.
Let’s get started
Okay, are you ready to purchase a new home and get pre-approved for that purchase? Your next step is to start the application process and get connected to one of our professional mortgage loan officers.
Types of Conventional Loan Programs
Conventional loans are generally any mortgage that is not insured or guaranteed by the federal government, as opposed to government-insured loans, including the Federal Housing Administration (FHA), the U.S. Department of Veteran Affairs (VA), and the U.S. Department of Agriculture (USDA). Conventional mortgages (whether conforming or not) typically have a slightly higher down payment than government loans; however, this loan option generally provides more flexibility with fewer restrictions.
These conventional loans can come in a variety of types. A few of these conventional loan types are listed below.
An adjustable-rate mortgage (ARM) is a loan term option with interest rates that can change periodically after the initial fixed-rate period. After this introductory period, monthly payments are susceptible to increases or decreases based on market fluctuations, affecting the monthly payment. An ARM could be the right choice for you if you plan on staying in your home for just a few years, you’re expecting a future pay increase or the current interest rate on a fixed-rate mortgage is too high.
Fixed-rate mortgages protect you against rising rates since the interest rate remains the same for the loan’s entire term. Plus, you have the option of selecting a 10, 15, 20, 25, or 30-year term. The main difference is that the lower term options have higher monthly payments, which means you are building home equity faster. Keep in mind you can use equity as a down payment for your next home or a future cash-out refinance. If you plan on staying in your home for a longer time frame, a fixed-rate mortgage could be the right solution for you.
A jumbo loan, or non-conforming mortgage, allows you to purchase more expensive homes with a loan amount above the conforming limit set by the Federal Housing Finance Agency. In most areas, the conventional conforming loan limit is $548,250; however, the limit is $765,600 in higher-cost areas. If you have a low debt-to-income (DTI) ratio and a higher credit score, but you don’t have enough funds to bring the loan amount under the conforming limit, a jumbo loan might be the right option for you.