Conventional Loans

So you have decided to purchase a home and now it’s time to explore the many different types of loans available to finance your purchase.  While it’s important to explore all your options, researching conventional loans is a good place to start.

What is a Conventional Loan?

A conventional loan is originated in the private sector and is not insured by the government.  Conventional loans are more difficult to qualify for than government-insured loans because they pose a greater risk to the lender.  A credit score of 620 and a debt-to-income ratio of 50% or less is generally required, but requirements do fluctuate. Most homebuyers that can meet these credit requirements opt for conventional loan products because they offer very competitive interest rates.  Another perk is being able to avoid private mortgage insurance with a 20% down payment.

Conforming conventional mortgages are originated according to certain guidelines so that they can be purchased by Government Sponsored Enterprises (GSEs) such as Fannie Mae or Freddie Mac in the secondary mortgage market.   Selling off existing mortgages allows lenders to maintain sufficient liquidity to keep lending to new homebuyers.  However, since the risk of default is being passed on, GSEs put forth credit requirements, down payment minimums, property condition guidelines, and loan limits to minimize this risk. The 2021 loan limit for conforming loans is $548,250.  For areas with a higher cost of living, the limit is up to $822,375.  If you want to purchase a home that exceeds this limit, you would need to apply for a non-conforming jumbo loan.

Down Payment Requirements for Conventional Loans

Conventional loans offer 3% down payment options, but select lenders are able to qualify buyers with 0% down.  Down payment requirements vary based on a number of factors including the type of property you are purchasing.  For example, you may need to put 15% down if you are purchasing a property with more than one unit.  If you’re purchasing a second home, there is a 10% down payment requirement.  Adjustable-rate mortgages require at least 5% down.  Renovation Financing options are also available with at least  5% down. HomeStyle Renovation Financing and FreddyMac ChoiceRenovation are worth looking into if you fall in love with a home in need of extensive renovations.