Conventional Loans

A conventional loan is a mortgage that isn't financed directly through a government-affiliated home buying program. You may also hear the term conforming loan. All conforming loans are conventional mortgages, but not all conventional mortgages are conforming loans. The term "conforming loan" means that the mortgage meets the standards for lending which are set by the government-sponsored enterprises Fannie Mae and Freddie Mac.

Conventional loans, whether they conform to Fannie Mae and Freddie Mac underwriting standards or they vary from them, are home loans that aren't directly part of a government home buying program like the Federal Housing Administration, Veterans Administration, or U.S. Department of Agriculture mortgage programs.

How does a conventional loan work?

A conventional mortgage will have monthly payments for the term of the loan. Interest rates charged, loan terms, and down payment can vary. With a conventional loan, lenders have options of considering a lower down payment than 20%, sometimes as low as 3%. Interest rates for a conventional mortgage loan can vary, sometimes lower than rates for government loan programs.

Conventional mortgage terms can vary too, from 15-year adjustable-rate mortgages to 30 year fixed-rate loans. Although a conventional loan differs from an FHA loan, USDA loan, or VA loan because it is offered by a lender that isn't affiliated with the government, it does have some things in common with government home buying mortgage options. Conventional loan requirements still take credit scores, loan limits, job history, and purchase price into consideration.

Conventional vs. Conforming and Non-Conforming

The overall category of conventional home mortgages can cover a lot of different lending options, terms, amounts, and types of loans. In the home lending industry, the term "conforming" means that a loan meets lending policies (underwriting standards) set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are restricted by law from purchasing any mortgages which exceed their conforming loan limit. The conforming loan limit varies by state and county and changes year to year.

A non-conforming loan is a loan that doesn't fit Fannie Mae and Freddie Mac's criteria in different ways. Some non-conforming loans are for larger amounts, aka jumbo loans or jumbo mortgages. Others provide home loans for people who don't meet conforming loan criteria, including self-employed individuals and people with negative credit histories. Government-backed loans including VA loans, FHA loans, and USDA loans, are also non-conforming loans.

Qualifying for a conventional loan

Buying a home is a big financial decision for you, the home buyer. Lenders also have criteria to qualify applicants, determine their best interest rate, and their choices of mortgage product. Your credit score is one determining factor when applying for a conventional home loan along with any other type of mortgage.

You may have read that you need a credit score of 620 or higher to qualify for a conventional loan, as well as other mortgage loan programs. Some mortgage programs will accept a credit score of 580 or higher.

Another factor in qualifying for a home loan is your debt-to-income ratio or DTI. This ratio refers to how much money you spend paying off debts each month compared to your monthly income. The debt part of DTI includes minimum monthly payments on credit cards, car loans, student loans, and personal loans. When a loan officer is reviewing your loan application, they will add up your monthly required debt payments and then divide it into your monthly gross income. As a general rule, a conventional loan will require a debt to income ratio of less than 50%, depending on the program or lender. A common debt to income ratio for many loans is 43% or less.

What is private mortgage insurance?

Private mortgage insurance is a type of insurance that helps lenders and investors reduce risk in case a borrower experiences difficulty repaying their home loan. Loans with a down payment of less than 20% typically require some type of private mortgage insurance or PMI. This amount is paid as part of your monthly mortgage payment. If you have more than 20% equity in your home you may be able to refinance into a new mortgage that doesn't require private mortgage insurance. Another way to avoid paying PMI is putting 20% or more as a down payment.

Applying for a conventional mortgage

CTC Mortgage's experienced loan officers are here to help you to determine which type of conventional mortgage is a good choice for your home buying needs. We can help you to get qualified for the right mortgage that will help you to buy the home you desire. Contact us today!