As you think of purchasing a home, one of the first things you probably think about is getting a mortgage to pay for your new home.  If you are a first time homebuyer, it can be very intimidating.  Even if you have bought homes before, it can still be a bit stressful to think about a mortgage.  There are so many lenders and so many types of mortgages.  One type of mortgage that you will likely hear a lot about is a conventional mortgage as roughly 60% of all mortgage applicants will end up with this type of loan.

So, exactly what is a conventional mortgage?  Well, a conventional mortgage is a loan that is not guaranteed or insured by any government agency.  Conventional mortgages conform to Fannie Mae and Freddie Mac guidelines.  As a result, conventional loans are also referred to as conforming loans.  Fannie Mae and Freddie Mac are publicly traded companies that are sponsored (key word) by the US government.  Both companies buy mortgages on the secondary market, pool them, and then sell them as mortgage-backed securities to investors in the open market.  Together, Fannie Mae and Freddie Mac are the largest source of financing homes in the country.  So in layman’s terms, the government authorized the creation of Fannie and Freddie to increase the pool of money available to homebuyers.  These 2 companies are part of a complicated process that keeps money moving through the U.S. housing economy.  This process allows more Americans to afford to buy homes.  Fannie Mae, mostly buys mortgages from commercial banks while Freddie Mac usually buys mortgages from smaller banks called “thrift” banks.  When a bank is able to move mortgages off the books, it frees up room for more lending capital, allowing more people to borrow.  See how that works?  Banks make mortgage loans to consumers.  However, they only have a set amount of capital.  Freddie Mac and Fannie Mae purchase loans from the banks and this allows the banks to “get paid back” and use the money to go on and make more loans.  In the meantime, Freddie Mac and Fannie Mae package the loans and sell them off.  This process allows them to “get paid back” and continue to go back to the banks and buy more mortgages.  Rinse and repeat.

As of 2017, the conventional loan limit is $424,100 for a 1 unit home.  However, there are some areas in which Fannie Mae and Freddie Mac have designated higher limits due to certain areas being high-cost.  Examples of areas with higher limits are New York City and San Francisco.  So if you are in one of the higher cost markets, you can borrow a higher loan amount with a conventional mortgage.

Conventional loans should not be confused with loans guaranteed or issued by government agencies.  Government agencies such as the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA) can insure or guarantee loans.

Usually, a conventional mortgage is a 30-year fixed rate loan.  However, a conventional loan can be a fixed rate or an adjustable rate (ARM) and can have a term of 10-30 years.  A conventional mortgage can also have a down payment as low as 3%.  If you do not put down at least 20% down though, you will have to pay private mortgage insurance (PMI).  Once you have at least 20% in equity, you can cancel the PMI.

Conventional mortgages can have better interest rates than non-conventional mortgages and therefore a great option for those that qualify and meet the criteria.  However, if you will not qualify for a conventional loan, it is still possible to get a mortgage.  By accepting a possibly higher interest rate, the borrower can still look at all of the options for non-conventional mortgages.

Top of Form

Here are some basics of conventional mortgages:

  • Conventional loans can be used to buy a primary residence, secondary residence, or rental property.  However, the guidelines on things such as DTI and down payments will vary depending on the purpose of the property.  There will also be higher interest rates for second homes and rental properties. 
  • Eligible properties include:
  1. Single Family Homes (detached homes)
  2. 2, 3, and 4 unit properties
  3. Planned Unit Developments (PUDS) which are detached homes in a homeowners associations
  4. Condominiums.  In order for the loan to qualify, the condo development must meet the following criteria:  At least 51% of all units must be occupied as primary or secondary residences.  Also, 90% of the units must be sold and currently owned by unit owners.  No one owner may own more than 10% of the total number of units.
  5. Some co-op properties
  6. A FEW lenders offer manufactured homes but these types of homes are much harder to get financed than others.
  • The conforming loan amount is usually $424,100 but can be higher in certain areas where home prices are higher.
  • The conforming loan amount is usually $424,100 but can be higher in certain areas where home prices are higher.
  • Typically conventional mortgages require at least 3% down payment.  However, 20% is ideal as down payments with less than 20% require private mortgage insurance (PMI) which increases your monthly payment.  The amount you pay for PMI will vary based on your credit.  If you need a mortgage that allows less than a 3% down payment, you should investigate if you would be eligible for a VA or FHA loan.
  • Conventional loans require good credit.  The credit score requirements will vary by lender, but generally, you will need a credit score of at least 680.
  • Usually, the maximum debt-to-income (DTI) ratio is 43%.  However, sometimes lenders may allow you to have a higher (but not higher than 50%) DTI if you have mitigating factors such as significant reserves and excellent credit.
  • Conventional mortgages will require you to provide the following at a minimum:
  1. 2 months bank statements (all pages)
  2. Most recent pay-stub
  3. 2 years of tax returns if self-employed or if you have rental income or non-salary income
  4. 2 years of W-2s
  5. Social Security, retirement, and/or pension award letters and 2 years 1099s
  6. Rental agreements if applicable
  • You can use gifts from a relative tor eligible non-profit to pay your down payment and closing costs.