The process of applying for a conventional loan can be confusing, even before you begin, starting with a key question: Which loan type, what type of mortgage, or what loan limit should you consider? Some homebuyers opt to go with a conventional mortgage with specific conventional loan requirements. Many don’t even know there are different mortgage loan types.
And yet, shopping around for a conventional loan mortgage can pay off. According to the National Housing Survey, those who search for the best mortgage lenders in the market are more likely to negotiate favorable terms for their mortgage — which translates into extra cash in your savings account at the end of the month.
From an FHA loan (Federal Housing Administration) to a loan from the Veterans Affairs (VA loan) or a USDA (United States Department of Agriculture) loan, knowing the various types of loan options available to you can make a big difference in your home-buying journey. The same is true for keeping in mind a few important factors about conventional loan requirements.
If you get stuck, remember: buying a home can seem complicated but Society Mortgage has your back. Our loan officers are here to help you find the best mortgage for your house or answer any question concerning any loan program.
What Is a Conventional Mortgage?
Even though conventional mortgages aren’t government-backed, many still use government-set loan limits along with income and credit score requirements to qualify for the mortgage.
Most of the time, a conventional mortgage loan costs less than government-backed loans. However, they have more stringent qualifications.
Some Conventional Loans Use Government-Set Criteria
You may think that just because the government doesn’t back conventional mortgages, you don’t need to meet any criteria set by them. However, many conventional loans do still conform to these loan conditions. This allows lenders to relieve some risk, making them more willing to lend money and possibly offering a lower interest rate for their borrowers. Certainly, a bad credit history or unpaid interest on credit cards will not help.
Conforming Conventional Loan
A conforming conventional loan credit is less than the maximum loan amount set by the Federal Housing Finance Agency (FHFA). In most counties, this means the minimum conventional loan is less than $484,350 as of 2023. In high-cost living areas, a conforming loan can be up to $726,535
In addition, a conforming loan meets loan standards that are set by Fannie Mae or Freddie Mac. Since these are both government-sponsored enterprises, a conforming conventional loan with certain conventional loan eligibility requirements is sometimes also called a GSE loan. In general, most conventional loans offered by banks, credit unions, and mortgage brokers are conforming conventional loans.
Non-conforming Conventional Loan
A non-conforming conventional mortgage loan is one that exceeds the FHFA loan limits or uses different underwriting standards from Fannie or Freddie.
One of the most common types of non-conforming loans is a jumbo loan. This is commonly used when you need to finance more than the FHFA loan limit, which means the bank or lender usually needs extra protection in case you’re no longer able to keep paying the loan.
Common Lending Criteria
When you apply for a conforming conventional loan, you’ll see similar lending criteria at different lenders. Most private lenders, for example, want to see for the borrower a minimum credit score of up to 680. Each mortgage lender, however, may have slightly different guidelines.
Many programs don’t have income requirements or a specific minimum down payment for a conventional loan. Instead, they look at how much debt a borrower has compared to their income. You’ll typically want to have a debt-to-income ratio (DTI ratio) of 46% or less.
Finally, you will most likely need a down payment of at least 5% — but putting at least 20% down could save you money on private mortgage insurance (PMI).
You Can Choose Different Rate Options
Mortgage rates are affected by several factors, including the cost of federal housing, the federal rate, and your financial situation. One of the things you may have to choose is whether you want a fixed-rate or adjustable-rate mortgage.
Fixed-Rate Conventional Loans
Conventional loans can be classified by their mortgage rates. A fixed-rate conventional loan has interest rates that stay the same for the life of the mortgage.
Many people prefer a fixed interest rate conventional loan because they will have a steady mortgage rate that they can plan for. It won’t be affected if rates rise.
The most common type of fixed-rate conventional loan is a 30-year fixed-rate conventional mortgage. This will save your personal finance situation with affordable monthly mortgage payments, though you could choose a shorter term — for example, 15 years.
You have the option on paying an additional fee for a lower rate!
Adjustable-Rate Conventional Loans
An adjustable-rate mortgage, or ARM, is the flip side of fixed-rate mortgages. As mortgage rates change, your interest rate will reflect that.
Most ARMs adjust annually. However, they may have an initial period of three to ten years with an initial fixed rate.
There Are Low Down Payment Options
Traditionally you needed a 20% down payment to get a mortgage. One benefit of doing this is that you can avoid having to purchase private mortgage insurance — but there are conventional mortgages that offer some flexibility if you need it.
3% or 5% Down Payment
Fannie Mae offers the HomeReady program, while Freddie Mac has the Home Possible one. Both are mortgage options based on your monthly income and allow you to put a down payment of only 3%. If you have a lower credit score, you may need to put down a 5% down payment. In either of these cases, you’ll have to finance the remaining 97% or 95% of the home’s purchase price.
There are actually zero-down payment conventional loans that allow you to finance 100% of the home’s value. These are offered by certain lenders that offer in-house non-conforming conventional mortgages. Typically, you must meet special qualifications to apply.
While a zero-down payment mortgage may sound tempting, it can be very risky. Since you don’t have any initial equity, it takes a lot longer to build up any equity. This typically means you’ll pay a lot more in interest.
You can get a loan for your renovations
A type of mortgage that many people don’t know about is a conventional renovation loan. This can be perfect if you buy a fixer-upper, whether you do so to stay within budget, because house prices are high, or because inventory is low.
These loans include the CHOICERenovation and the HomeStyle loans. You can finance the home purchase and renovations with the same loan.
Find the Right Mortgage for Your Home
Finding the right mortgage and monthly payment that matches your monthly finances can be challenging and requires expert advice. Especially when you already carry student loans or personal loans. We have compiled the lists below to help you better understand the pros and cons of a conventional home loan to buy a home.
Pros of a conventional home loan
- Borrowers with great credit (740+) taking advantage of Conventional Loans will benefit by having a lower mortgage insurance premium and lower conforming conventional loan rates.
- Unlike with FHA, Private Mortgage Insurance does not last the entire life of the loan and can potentially be waived when you hit 20% equity or higher down payment altogether.
- A current homeowner can purchase as many homes as they wish, provided they can fulfill the down-payment requirements.
Cons of a conventional home loan
- Lower credit scores will be penalized by additional fees called Loan Level Price Adjustments. Having a good credit score is important to get a conventional mortgage with good terms and conditions.
- First-time home buyers have a 3% minimum down payment.
- With additional residences, the required down payment conventional loan increases upward of 20%, with 10% being the minimum requirement for the second home.
Trust Society Mortgage for Your Conventional Loan
In the vast money market of home financing, understanding your options is paramount. As you compare and research the myriad of choices, remember that conventional loans come with a unique blend of benefits and requirements.
Whether you’re a first-time homebuyer or looking to refinance, your credit profile, closing costs, and potential insurance premiums will play a role in the loan option you select. Don’t let higher interest rates deter you; with the right loan term and type of loan, you can secure a deal that aligns with your financial goals. If you ever find yourself pondering over adjustable-rate loans or the intricacies of the VA funding fee, our service is always reserved for you.
At Society Mortgage, we prioritize consumer financial protection and equal housing opportunity. Whether you need a loan to purchase a cozy single-family home or are considering a portfolio loan for broader investments, we’re here to show the way. Dive into our press room for the latest updates, and always remember to check your credit report and consumer access rights. With every step, we aim to simplify the process, ensuring that your home financing journey is as seamless as possible.
Are you still not done with your previous personal loan or are facing high installments from your credit cards? Are you a first time homebuyer looking for a conventional mortgage that fits your finances? Society Mortgage can help you get a conventional loan tailored to your needs. If you are ready to get started with your home purchase, contact Society Mortgage today!
Frequently Asked Questions
Mortgage loans come in various forms to suit different needs. Fixed-rate mortgage loans offer stable interest rates over the life of the loan, while adjustable-rate mortgages (ARMs) have fluctuating rates. Conforming loans adhere to Fannie Mae and Freddie Mac guidelines and have borrowing limits, whereas non-conforming or jumbo loans exceed those limits and often come with stricter requirements. Interest-only mortgages allow for lower initial payments by covering only interest, and balloon mortgages require a large final payment after regular installments. Piggyback loans help avoid private mortgage insurance by using two simultaneous loans, and combo or hybrid loans mix features of both fixed and adjustable-rate mortgages. Each type has its own pros and cons, tailored to various financial situations and goals.
Contact Society Mortgage today and one of our expert mortgage consultants will give you all the information and guidance you need to choose the best option for your housing needs!
Mortgage loans are commonly used for financing a variety of residential properties, including single-family homes, multi-family homes like duplexes and triplexes, condominiums, and townhouses. They can also be used for Planned Unit Developments (PUDs), second homes, vacation properties, and business investment properties. We even offer conventional loans for manufactured homes.
The terms, interest rates, and down payment requirements can vary depending on the type of property and whether it’s a primary residence, a second home, or an investment property.