What is a conventional loan?
When most people think of a
mortgage, they’re thinking of a conventional loan.
Thanks to their wide
availability and low rates, conventional loans are the most popular mortgage in
In fact, almost 3 in 5 buyers use a conventional loan for buying or refinancing a home.
Conventional loans have no special eligibility
pretty much all
lenders offer them. You could qualify with just 3% down and a 620 credit score.
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Conventional loan requirements
Conventional loan requirements vary by lender, but all conventional loans have to meet certain guidelines set by Fannie Mae and Freddie Mac:
also has to be within conforming loan limits: up to $510,400 in most areas, but higher in some high-cost ZIP
If you apply for a
conventional loan with better credentials — like a 740 or higher credit score and 20% down payment, for example — you’ll get access to
lower rates and a lower monthly payment.
If you’re on the edge of qualifying
for a conventional loan — with a credit score right around 620 and higher levels of debt —be
extra sure to shop around.
Mortgage lenders can set their own requirements
and rates for conventional loans, as long as they fall within the conforming loan limits set by Fannie
So you can likely find one
that’s more flexible and has better rates for your situation.
Minimum down payment for a conventional loan
It’s a common myth that you need a 20% down payment for a conventional loan; you can actually get one with as little as 3% down.
All told, there are six
major mortgage options for conventional
loan down payment requirements, ranging from 3% to 20%.
These types of conventional
- Conventional 97 loan — 3% down
- Fannie Mae HomeReady loan — 3% down
- Freddie Mac Home Possible loan — 3% down
- Conventional loan with PMI — 5% down
- Piggyback loan (no PMI) — 10% down
- Conventional loan without PMI — 20% down
So, how do you qualify for a
conventional loan? Simply by matching requirements set out by Fannie Mae and
Once you do that, you can join the club of conventional
loan homeowners who make up about 69% of the market.
20% down payment myth
Where does the myth about the
20% down payment requirement come from? Probably from shoppers who want to
avoid paying private mortgage insurance premiums.
When you put less than 20%
down on a conventional loan, your lender will require private mortgage
insurance (PMI). This coverage helps protect the lender if you default on the
PMI does increase monthly mortgage payments. But that’s OK if it allows you to get a conventional loan with a down payment you can afford.
Also note that conventional
PMI can be canceled later on, once your home reaches at least 20% equity. So
you’re not stuck with it forever.
Conventional loan rates
Conventional loans come with low rates that make home buying affordable.
Today’s average rate for conventional loans is 2.75% (2.75% APR) for a 30-year, fixed-rate mortgage, which is the most popular type.
For a 15-year conventional loan, the average rate drops to 2.625% (2.625% APR).
Today’s conventional loan rates (October 8, 2020)
|Loan type||Average Interest Rate||APR|
|Conventional 30-Year FRM||2.75%||2.75%|
|Conventional 15-Year FRM||2.625%||2.625%|
|Conventional 5/1 ARM||3%||2.743%|
*Average rates reported daily by TheMortgageReports.com lender network. See our full loan assumptions here
Conventional loan rates are heavily based on the applicant’s credit score — more so than rates for FHA loans.
For instance, a home buyer with a 740 score and 20% down will be offered about a 0.50% lower rate than a buyer with a 640 score.
Rates are also based on mortgage-backed securities (MBS) which are traded just like stocks. And like stocks, conventional loan rates change daily, and throughout the day.
the markets to lock in the lowest rate
What’s the best way to
secure a low rate? Watch market movements so you know a good rate when you see
Conventional loan rates can drop — or rise — quickly when financial news hits the market. For instance, if the Federal Reserve decides to cut its benchmark rate, conventional loan rates could fall, too.
Rates for 30-year fixed conventional loans have remained below 3.5% for some time, and rates are not expected to rise above that level in the near future.
Still, the lowest rates are available to those who are ready to lock in when rates drop.
Any mortgage-approved applicant who has
selected a property to buy can lock in a rate.
around with at least three different lenders
Finally, it’s important to get a personalized rate quote.
Published rate averages are often based on the “perfect” applicant — one with great credit and a large down payment. Your rate might be higher or lower.
It pays to get at least
three written quotes from different lenders, no matter which loan length or
conventional loan type you choose. According to one government study,
applicants who shopped around receive rates up to 0.50% lower than
Get a conventional rate
quote based on
your information — not on the information of an average buyer.
Conventional mortgage payment calculator
Benefits of a conventional home loan
Conventional loans are the
most popular type
After that come government-backed mortgages, including FHA, VA, and USDA
Government-backed mortgages have some unique benefits,
including small down payments and flexible credit guidelines. First-time home buyers often
need this kind of leeway.
But conventional loans can outshine mortgages subsidized by
government agencies in several ways.
For example, conventional mortgages
have diverse repayment plans, borrowers don’t have to meet any ‘special’
criteria (like military status or geographic location) to qualify, and there’s
no upfront mortgage insurance fee.
Flexible repayment plans
As with most mortgages, conventional
loans offer several repayment options.
Conventional loans come in
15, 20, 25, and 30-year terms. Some lenders
even offer 10-year conventional loans.
The shorter your loan term,
the higher your monthly payment.
Fortunately, a 30-year fixed-rate conventional
comes with low fixed-interest payments that are accessible to the majority of
home buyers and refinancers.
Adjustable rates available
Conventional loans are also a smart choice for those who know they won’t remain in their house long and want a shorter-term, adjustable-rate mortgage. This option comes with a lower interest rate than that of a fixed-rate loan.
Adjustable rates are in fact
fixed, but only for a period of time — usually 3, 5, or 7 years. During that
initial “teaser” period, the homeowner pays ultra-low interest and can save
Today’s home buyers often choose a 5-year ARM or 7-year ARM. These loans can provide thousands in savings while giving the home buyer enough time to refinance into a fixed-rate loan, sell the home, or pay off the mortgage entirely.
But after this low
introductory rate expires, the loan’s interest rate — and its monthly mortgage
payment — could decrease or increase each year, depending on market
This makes ARM loans
inherently risky for homeowners, and an option that should be considered very
No special requirements to qualify
Conventional loans are the least restrictive of all
loan types, in some respects.
loans have no special requirements. They’re available to anyone with a good credit score, stable
income, and money for a moderate down payment.
have specific purposes and come with a variety of limitations:
- USDA loans are only available in designated rural areas. This is fine for home buyers who live and work in suburban and rural locations. However, for those in major cities, a USDA-eligible home could extend a commuting distance beyond what is reasonable
- VA loans are available only to current and former military service members. They offer a lot of benefits, like zero down payment and no monthly mortgage insurance. But they are not available to the general population
- FHA loans are a powerful home buying tool, but they come with high mortgage insurance fees that are payable for the life of the loan — up to 30 years. The only way to cancel FHA mortgage insurance is to refinance out of the FHA loan, which would require paying closing costs again
Additionally, most loan programs provided by the federal government
can’t be used for second homes or investment properties. They’re designed to
help Americans buy single-family homes to be used as a primary residence.
First-time and repeat buyers
can land a good value when they choose a conventional loan for their home
And, more buyers qualify for
this loan than you might expect.
No upfront mortgage insurance fee
Conventional loans do not
upfront mortgage insurance fee, even if the buyer puts less than 20% down.
FHA loans, USDA mortgages, and even VA loans require
an upfront insurance fee, usually between 1% and 4% of the loan amount.
Conventional loans only
require a monthly mortgage insurance premium, and only when the homeowner puts down less than 20 percent.
Plus, conventional mortgage
insurance may be lower than that of government loans if you have good credit
and a decent down payment.
How do you qualify for a conventional loan?
A lot of home shoppers think
it’s too hard to qualify for a conventional mortgage, especially if their financial
situations aren’t perfect. But that’s not really the case.
Just like with an “easy”
government-backed loan, qualifying for a conventional loan requires you to
- You make enough money to cover monthly payments
- Your income is expected to continue
- You have funds to cover the required down payment
- You have a good credit history and decent score
True, the standards to
qualify for a conventional loan are slightly higher than for an FHA or VA loan.
But they’re still flexible enough that most homebuyers are able to qualify.
According to loan software
company Ellie Mae, the average credit score for all applicants who successfully
complete a mortgage is around 720. This is plenty high to get approved for a
The minimum credit score required for most conventional loans
is just 620.
“We want to know that people
pay their bills on time and are financially disciplined and good at money
management,” says Staci Titsworth, regional vice president sales manager with
PNC Mortgage in Pittsburgh, PA.
A slightly lower credit score may pass the credit score
test, but the
lender will typically charge a higher interest rate to compensate for the
Applicants with lower credit
may want to choose an FHA loan, which does not charge extra fees or higher
rates for lower credit scores.
Be sure to check your credit
report before applying for a mortgage so you’ll know where you stand.
Employment and income
During the mortgage
application process, home buyers must provide proof of earnings, which may involve some or all of the
- 30 day’s pay stubs
- 2 year’s W2s
- 2 year’s tax returns if self-employed
- An offer letter, if not yet started
- Proof of education for new graduates
“Most lenders require two-year documentation to show a consistent
earnings stream,” Titsworth says.
Alimony can also be counted
if documented in a divorce decree, along with the recurring method of payment
such as an automatic deposit.
Seasonal income is also accepted with proof in a tax return.
A lender won’t approve a
mortgage for an amount that’s greater than the value of the home. Before
closing on the loan, the lender will appraise the property to determine its
As an example, let’s say the
buyer has agreed to pay $200,000 for a home but the appraisal comes in at
In this case, the home buyer
should use this appraisal as a bargaining chip to get the seller to lower the
price to a level the lender will finance.
Or, the buyer could pay the
additional $10,000 out of pocket to compensate for the lower borrowing limit.
This $10,000 would be added to the down payment you’d already agreed to pay.
For instance, if you were
putting 20% down on the $200,000 home, that’s $40,000. But the appraised value
is $190,000. You would be required to put down 20% of the new value — $38,000
– plus the $10,000 shortfall in value, for a total of $48,000.
Value isn’t the only thing
to watch for when getting a conventional
Sometimes during an inspection, the appraiser may require another professional’s opinion.
“If the appraiser sees water
stains or a lot of leaky faucets, he may request a plumbing inspection. The
seller may need to make improvements, which could delay a closing,” Titsworth
However, conventional loans actually come with less strict appraisal and property requirements than FHA, VA, or USDA loans.
This is another advantage to
conventional: You can qualify for a home in slightly worse condition and plan
to make the repairs after your loan is approved and you move in.
The amount of the borrower’s down payment can affect the interest rate and final loan costs.
Putting down a larger amount
mortgage costs will be lower.
A down payment of at least 20%
will also eliminate conventional mortgage insurance. By contrast, FHA and USDA
loans require mortgage insurance regardless of how much money you put down.
7 low-down-payment conventional loans
|5% down with PMI (Conventional 95)||One loan at 95% loan-to-value. PMI required.|
|Conventional 97||3% down. No income limits.|
|HomeReady™||3% down. Must be at or below the geographical area’s median income unless home is located in underserved area.|
|90% loan||One loan with 10% down. PMI required.|
|Piggyback 80/10/10||10% down, 10% second mortgage, and 80% conventional loan. No PMI required|
|Home Possible Advantage||3% down loan with income restrictions. Offered by Freddie Mac home lenders.|
|Down Payment Gift||Applicant may receive any percentage of the down payment as a gift from family or other eligible source.|
Conventional loans with just 3% down
Many conventional loans are
made with as little as 3%
The HomeReady mortgage program is one such option. It allows non-borrowing members of the household to help the loan applicant get approved.
Lenders will consider the
income of mothers, fathers, extended family, and non-married partners — even when they are not
officially on the loan file.
The Conventional 97, as the name suggests, allows home buyers to borrow 97% of the home’s price. Unlike the HomeReady option, these loans are available to applicants at any income level buying a home in any location.
The drawback to a 3% down
loan? The interest rate may be
higher to compensate for the smaller amount down.
Mortgage insurance may be more expensive as well, as compared to a 5% or 10% down conventional loan.
Avoid PMI with an 80/10/10 loan
The piggyback 80/10/10 loan option lets the applicant skip the full 20% down payment and skip the mortgage insurance.
How? The applicant applies for a
first mortgage for 80%
of the purchase price. Simultaneously, he or she opens a second mortgage, such
as a home equity line of credit (HELOC) for 10% of the purchase price.
Then, only 10% down in cash is required because the lender allows the
borrowed 10% loan to count toward the
applicant’s down payment.
Together, the second mortgage and the cash total 20% down, eliminating the need for mortgage insurance premiums.
Sourcing your down payment
A conventional loan borrower
has the option to put anywhere from 3% to
20% down or more.
Plus, a down payment gift can cover the entire amount in some cases. Check with your loan officer for gift and donor documentation requirements.
Unless it’s a gift, the applicant will
need to verify a valid source of the down payment such as a savings or checking
Applicants can liquidate investment accounts and even use a 401k loan for the down payment.
Typically, home buyers will
need to supply a 60-day history for any account from which down payment funds
Private mortgage insurance (PMI)
Private mortgage insurance,
or PMI, is required for any conventional loan with less than a 20% down
PMI rates vary considerably
based on credit score and down payment.
For instance, one PMI
company is quoting the following rates, as of the time of this writing, for a
$250,000 loan amount and 5% down:
- 740 credit score: $123 per month
- 660 credit score: $295 per month
And these are quotes for a 10% down payment:
- 740 credit score: $85 per month
- 660 credit score: $208 per month
Higher mortgage insurance premiums for borrowers with lower credit scores prompt many buyers to use an FHA loan.
Unlike conventional loans, FHA loans do not charge higher mortgage
insurance rates, even for applicants with very low scores.
Another factor that might
affect your PMI rate: the mortgage insurance company itself.
Your lender usually chooses your PMI company, and different companies may charge different rates. However, you do have some say in the choice. If you know a particular PMI company that offers the best deal, ask if your lender works with them.
If not, the lender may be
able to provide a similar offer from a different PMI provider, or you can
choose a lender that works with your chosen mortgage insurance company.
Conventional loan limits
Nationwide conventional loan limits start at $510,400 and go higher in many locations.
For instance, Fannie Mae and Freddie Mac allow a loan amount up to $765,600 in certain high-priced ZIP codes.
Home buyers who need a loan amount above the standard limit should check for the specific limit for their area.
Loans in excess of an area’s conventional loan limits are considered non-conforming loans.
These require a jumbo loan instead of a conventional loan
The buyer’s debt-to-income
ratio (DTI) also plays a factor in conventional loan qualifying.
DTI compares your total monthly debts (including mortgage costs) to your gross income. This number is used to determine how large a mortgage payment will fit within your monthly budget.
Many lenders want this ratio
to be less or equal to 36% of
the borrower’s income.
However, conventional loans
may allow a DTI as high as 43%.
To find your debt-to-income ratio, add up your loan payments, including:
- Student loans
- Personal loans
- Car loans
- Credit card minimum payments
- Your projected mortgage payment
Also add in any child support or alimony payments you’re required to make each month.
Then divide this sum by your
monthly gross (pre-tax) income.
Closing costs will include fees such as a lender’s origination fee plus vendor fees like the appraisal, title insurance, and credit reporting fees, says Titsworth.
Sometimes, a lender or
seller will pay all or some of these expenses depending on the strength of the
market and desire to close the transaction.
Typically, sellers and other
interested parties can contribute the following amounts, based on the home
price and down payment amount.
- Less than 10% down: 3% of the purchase price
- 10 to 25% down: 6% of the purchase price
- More than 25%: 9% of the purchase price
With a rental or investment property, the seller can contribute only 2% of the purchase price toward closing costs.
Conventional loan vs government loans
Home buyers have dozens of
mortgage loan options today.
In general, though, mortgages
can be divided into two broad categories — government-backed loans and
The rule of thumb is that if
you have good credit (680+) and a large down payment (5% or more), a
conventional loan is often best. If you have lower credit and/or a smaller down
payment, a government-loan can help.
But those are not universal
rules. The best type of mortgage for you will depend on your budget, your
credit, and your home buying goals.
To help guide you in the right
direction, here’s a broad overview of conventional vs. government loans, and
who they’re best for:
- Conventional loans — Privately-backed loans that tend to be most affordable for people
with credit scores above 680 and down payments of 5% or more. However,
conventional loans are also available with credit as low as 620 and a down
payment as low as 3%
- Jumbo loans — Jumbo loans are the right option for people buying high-priced
homes. That includes any loan amount above $[conventional_loan_limits] in most
areas. You typically need a credit score of 700 or higher for a jumbo loan
- FHA loans — FHA loans are backed by the Federal Housing Administration. They’re
typically best for people with credit between 580-680 and a down payment of at
- VA loans — VA loans are almost always best for qualified veterans and military
members. They let you buy a house with 0% down, exceptionally low interest
rates, and no monthly mortgage insurance
- USDA loans — These zero-down loans are available in select rural and suburban
areas. They’re reserved for home buyers with low- to moderate-income, and
typically have below-market interest rates
If you’re not sure which type of loan is best for you, read up on your options or chat with a loan officer about what you might qualify for.
Check your conventional loan eligibility
The bottom line is that it’s
very important for home buyers to shop around for a conventional mortgage with
at least three lenders.
Today’s rates are very low,
and can be even lower with the right shopping practices.
Check your conventional loan
eligibility and rates today.
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Published at Thu, 08 Oct 2020 11:45:47 +0000