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Conventional Home Loans

Learn About The 2019 Conventional Loan Programs and Guidelines.
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Conventional Loan Requirements 2020

This page reflects the current conventional mortgage guidelines for 2020.  We provide current mortgage information, and update content immediately upon program and guidelines changes.  Be sure if you are reading other websites to check the most recent publish date to ensure accuracy .  This page was updated on December 31st, 2019 and the information is current.

Conventional mortgages are different from other loan types such as FHA, VA, and USDA loans, which are loans backed and insured by the government.  You could look at a conventional loan as the most basic and standard conforming loan.  These loans are usually best for someone who has good or excellent credit.  They usually are thought to be only for someone who is able to make a large down payment of 20% or more, but many can purchase a home with as little as 3-5% down with a conventional loan.  The 20% down payment will allow you to avoid paying PMI (private mortgage insurance) though which if someone is able to make this size of a down payment, it is advised to do so.

What Are Conventional Loan Guidelines / What is Need to Qualify?
Conventional mortgages adher to the conforming guidelines of Fannie Mae and Freddie Mac, which are all semi-government agencies, but they do not insure loans like the Federal Housing Administration, Veterans Administration, and the Department of Agriculture.  Therefore, any loan that is not a FHA, VA, or USDA loan is a conventional mortgage.

The qualification guidelines for a conventional mortgage vary a little bit, but typically for a loan to be approved it must meet the following:

  • Credit Score – There is no concrete credit score needed to qualify for a conventional loan, but generally you must have at least a 620 middle FICO score to qualify for any conventional loan products.
  • Down Payment or Equity – Generally, you will need either a 3% down payment, or 5% equity to qualify for a conventional home loan.  However, if you are upside down in your mortgage and owe more than your home is worth, you may qualify for a HARP government loan, which assists borrowers with financing options who are underwater in their mortgages.
  • Mortgage Insurance – Any mortgage that reaches a loan amount that is at least 80% of the appraised value must pay mortgage insurance.  This is known as PTI (private mortgage insurance).
  • Debt-to-Income Ratio – Most loans will require that the monthly mortgage payment, along with monthly payments on other debts, not exceed more than 45% of your income (if you have a co-borrower than it is your combined income).  There are potential exceptions to this rule, but this is the general rule for DTI ratios.  Also, this is the maximum.  Some applicants will not qualify for a 45% DTI, and in some cases, can be as low as 36%.  The DTI that you can be approved for depends on a number of variables, such as the strength of your credit report, job history, and savings/assets. Keep in mind, there are ways to lower your DTI ratio such as financing PMI into a single payment wrapped into the loan amount.

Don’t meet these requirements?  You may want to consider an FHA loan which is much easier to qualify for.  Even if you are turned down for a conventional loan, you may be able to easily get a FHA loan.

What Are Some Advantages of Conventional Loans?
Conventional loans offer some excellent advantages over other loan types for the right types of borrowers.  One of the ways a conventional loan could save you money is if you either put enough down to avoid mortgage insurance altogether.  However, many people who receive a conventional loan on a higher LTV (up to 97% on home purchases) will be required to pay PMI.  There is no getting around this at any lender.  The good news though, is the mortgage insurance options for a conventional loan are much better than FHA loans.  This includes the following often less noticed benefits of a conventional loan:

  • Single payment mortgage insurance –  You have the option to pay all of your monthly mortgage insurance in one lump payment.  This is not to be mistaken to Upfront Mortgage Insurance Premiums (UPMIP) which are applicable to FHA loans.  How single payment mortgage insurance works is you can pay all of your monthly PMI payments in one payment.  This can save you money a lot of money since if you decide to pay it all upfront, it is only 1.75% of the loan amount, and then no future
  • No upfront mortgage insurance – This is not to be mistaken as the above option of paying your monthly insurance as a single payment upfront.  FHA loans required both an Up-Front Mortgage Insurance Premium (UPMIP), and for Mortgage Insurance Premiums (MIP) to be paid monthly.  There are two types of mortgage insurances required on FHA loans which is why conventional loans are being sought out in increasing numbers lately.
  • Easier to cancel mortgage insurance.  To learn more about mortgage insurance on conventional loans, click here to read a guide.

Conventional Purchase Loans

Conventional loans are available for both owner occupied and investment property purchases.

  • Owner occupied – There is no question that conventional loans are usually best for people with excellent credit (or what would be rated as “very good” such as scores in the low 700s).  The rates are usually lower than they are for FHA, mortgage insurance can be avoided (or canceled) with greater ease, and other less obvious perks make conventional loans the best choice for many.
  • Investment properties – If you want to buy an investment property, a conventional loan will likely be your only option.  Government sponsored loan programs are almost always exclusively for owner occupied residences.

Conventional Refinance Loans

Conventional loans provide opportunities that other loan types do not.  For instance, you can eliminate PMI much earlier and with greater ease than you can cancel FHA mortgage insurance premiums (MIP).  Conventional loans are also ideal for refinancing an investment property or vacation home.

  • Conventional cash out refinance – the conventional cash out refinance is a perfect solution for homeowners wanting to cash out 80% or less of their home equity.  Avoid mortgage insurance and enjoy lower rates causing a much lower payment than a FHA loan with a higher rate and both upfront and monthly mortgage insurance.
  • Conventional rate/term refinance – the easiest way to lower your rate on a conventional loan is a rate and term refinance.  This simply means that you are refinancing to lower your interest rate and improve various loan terms such as switching to a fixed rate, eliminating PMI, or other loan improvements.

Would you like to get a rate quote for a refinance?  Request a free consultation today.

Conventional Mortgage Rates
There are no set rates for conventional loans.  Not throughout the industry, or even with any one particular lender.  The way your offered rate is determined is based upon credit score, LTV, and if you occupy the property yourself.  High LTV loans, lower credit scores, and investment properties all see higher rates than someone with better credit, more equity, and occupies the home themselves.  You can choose from a wide range of loan terms including fixed rate and adjustable rate mortgages.

  • Fixed Rate Mortgages  – There are two fixed rate loan term options, the 30 year and 15 year fixed rate.  The 30 year fixed rate mortgage is the most common loan term.  More homebuyers and homeowners seek this loan program for the benefit of lower monthly payments than a 15 year loan would provide.  The conventional 15 year mortgage offers even better rates than a 30 year loan, and also has the potential to avoid PMI.  Want to compare a 30 year and 15 year mortgage so that you can see what your payment would be, how much total interest will be paid (know as the “true cost of a loan”), and determine which mortgage is right of you?  Click here to compare these loan terms.
  • Adjustable Rate Mortgages  – Conventional adjustable rate mortgages (ARM loans) are usually available in either a 3 year, 5 year, 7 year, or 10 year term.  These are known as the conventional 3/1 ARM, the conventional 5/1 ARM, and the conventional 7/1 ARM, and the conventional 10/1 ARM.

Conventional Jumbo Loan
Conventional loans are the only option for home buyers who want to purchase a home and secure a loan that is over the conforming loan limit.  These loan limits are set at the county level and vary from one location to another.  For most single unit properties, the conforming loan limit is $510,400.  This amount is higher in what are known as “high cost areas” around the country.  You can search to see what the loan limits are for your county.  Our jumbo home loan programs offer financing up to 2 million dollars.

Conventional Rehab Loans
Want to buy a home that needs to be rehabilitated?  Or perhaps you want to refinance and make repairs to your home.  The Fannie Mae Homestyle Renovation Mortgage allows you to take out a loan based on what the expected value of the home will be after renovations are completed.  This is the conventional program that could be compared to the FHA 203k renovation loan, but suited for better credit borrowers.  For a those who possess great credit, the Homestyle program will likely offer better terms.  These will vary based on the individual borrower, but it should be expected to receive lower interest rates and mortgage insurance can be avoided on LTVs below 80%.  If you are shopping around for a rehab loan, we advise to compare both the Homestyle and 203k loan and see what is more suitable for your needs.

Would you like to learn more about conventional mortgages? We offer free consultations, which includes a pre-approval and rate quote.

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