What is a Conventional Loan?
A Conventional loan (aka Conforming loans) is not insured by any government program. They are the most common type of mortgage and follow the guidelines set forth by Fannie Mae and Freddie Mac (aka FNMA and FHLMC). There are loan amount limitations as outlined below. Conventional home loans are available above these loan limitations, see Jumbo Loans. Below, please find the highlights to conventional loans.
Benefits of a Conventional Loan
Compared to government-backed mortgage products, they are more flexible in their respective loan terms. They have fewer underwriting restrictions. Borrowers with a stable employment, income, and credit are typically better candidates for a conventional loan.
Other loan advantages include:
- Down payment as low as 3%
- Fixed and Adjustable rates available
- Lower mortgage rates for borrowers with Better credit
- Terms from 10 to 30 years
- Financing for Owner Occupied (primary residence), second home (10% down payment) and Investment property (20% down).
- Both purchase or refinance transactions
- No PMI with a 20% down payment. A Conventional loan with PMI can be canceled once sufficient equity is obtained
See our Homebuyer Guide
Conventional Loan Mortgage Rates
With a fixed-rate mortgage, the rate will never change for the life of your Conventional loan. Thus protecting you from rising rates. Conventional home loans typically offer lower rates and APR’s than other types of financing.
Conventional loan terms are 10, 15, 20, 25 and 30-year fixed. Shorter terms for conventional loans have higher monthly mortgage payments but offer lower interest rates. Therefore, you will build up home equity faster and pay less interest. You can use this acquired equity as a down payment when you buy a home.
Adjustable-Rate Mortgage (ARM)
An ARM has initial introductory rates for the first 5 or 7-years. Following the initial period, the rate can adjust annually for the remaining term. There are subsequent annual and lifetime interest rates caps that limit the amount the rates can change. Adjustable rates are best for shorter terms of home ownership.
See Mortgage Rates
Requirements of a Conventional loan
The minimum down payment for Conventional is 3% of the contracted purchase price. There are income limitations and no additional property ownership at the time of closing. Otherwise, the minimum down payment is 5% of the purchase price. Conventional is a strong competitor to government-backed FHA loans. FHA’s minimum down is 3.5%.
While most FHA mortgage insurance remains for the for life, a conventional loans PMI may be canceled. Typically, those who have a FICO score of 680 or higher opt for this program over FHA.
Eligible sources for down payment
In summary, the down payment for closing can come from any asset to purchase real estate. However, loans and unverifiable cash is not allowable. Please feel free to contact a Loan Officer with questions.
Conventional Maximum Mortgage Amount
The maximum conventional loan limit for Kansas and Missouri for 2018 is:
$453,100 for a one-family property
$580,150 for a two-family property
$701,250 for a three-family property
$871,450 for a four-family property
Minimum Credit Scores
Conventional loans are a good choice for borrowers with a credit score of 620 or higher. However, there is “risked based” based pricing (See LLPA below). In other words, the interest rate is based on the middle FICO score and the amount of your down payment. FHA may be a better option than a Conventional mortgage if you have troubled credit. Contact one of our Loan Officer to find out which option will be best for you.
Private Mortgage Insurance (PMI)
When putting less than 20% down, lenders requires PMI. The risked-based insurance protects the mortgage lender from losing money in case of default. Borrowers with good credit and a larger amount down (i.e. 10% or 15% down) can enjoy cheaper monthly insurance payment than with an FHA loans.
There are other loans that do not have PMI included in your monthly payments. Such as Lender-paid PMI, combination first and second loans and single payment PMI. A Loan Officer can help to determine which loan option is cheapest for your personal situation.
Loan Level Price Adjustment (LLPA)
An LLPA is a risk-based fee assessed (by FNMA and FHLMC) to loans greater than 15-years. The LLPA price adjustments vary by the borrower and specific loan traits. Such as loan-to-value (LTV), credit score, occupancy type, and the number of units in a home.
For example, a borrower with a 740 FICO and a 20% down payment is assessed .25% loan fee (not to the rate). However, borrowers with a 660 FICO and the same down payment would have a 2.5% fee. A conventional loan is typically better for credit scores greater than 680. Applicants with lower scores can still qualify. However, their closing costs may be lower with other programs, as with an FHA loan.
A debt-to-income ratio (DTI) is the total monthly housing expense plus debt obligations divided by the total gross monthly income. This Debt-to-income ratio is one-way lenders measure your ability to manage the payments. Generally, the maximum DTI for Conventional loans is 45%, and up to 50% with compensating factors.
Generally, Conventional loans have a maximum DTI is 45% and with strong compensating factors 50%. Such as a high credit, job stability, and cash reserves. The best way to verify the maximum amount you can borrow based on your income level is to start pre-approval.
Eligible Properties for Conventional
Many types of properties are eligible. For Example:
Single-family homes (Detached homes)
Planned Unit Developments (PUD’s) which typically consist of detached homes within a homeowner’s association.
2, 3, and 4-unit properties
Some co-op properties
Manufactured homes (loan limitations apply)