What is a Conventional Loan?

By definition, a conventional loan is any mortgage that’s not guaranteed or insured by the federal government. Conventional loans can be either “conforming” or “non-conforming”, although conventional loan requirements generally refer to the set of mortgage guidelines that ‘conform’ to the government sponsored enterprises (GSE’s) like Fannie Mae or Freddie Mac. Hence, when you hear someone talking about ‘conventional loans’, ‘conforming loans’ or ‘conventional conforming loans’, they’re likely referring to the same thing.

What is a Conventional Conforming Loan?

Conventional Loan RequirementsConventional conforming loans follow the guidelines set forth by Fannie MaeFreddie Mac and the Federal Housing Finance Agency (FHFA).  In the overall sphere of mortgage requirements, conventional conforming loans are the most straightforward. Good borrower credit history, skin-in-the-game down payments, and full documentation of income and assets are the standard for conforming loan approval. These requirements have made them a pillar of the housing market for decades.

What are Conventional Conforming Loan Requirements?

To decide if you qualify for a conventional mortgage, various aspects of your financial history will be looked at:

  • INCOME AND DEBT – Your income and your monthly expenses are important. Conventional mortgages use fractions and percentages to qualify applicants based upon their income and their ability to repay their mortgage on time.  Standard conforming loan debt-to-income ratio limits are 28/36. These DTI limits may be exceeded with compensating factors.
  • CREDIT HISTORY – Your credit history is important. The minimum credit score for conventional loan programs is often a 620 or above.
  • MORTGAGE LIMITS – The maximum conventional conforming loan amount is $424,100 across most of the U.S. for single-family homes. Conventional loan limits are based on local home values and can vary depending on the area.
  • LOAN-TO-VALUE LIMITS – There are value-based limits on conventional loan financing. Current conventional programs permit up to 97% loan-to-value, though 80% is the maximum LTV to avoid mortgage insurance.
  • Lenders often look at your overall pattern rather than any individual problems you may have had.

Conventional Mortgage RequirementsTo speed things along, Fannie Mae provides a powerful computer application called “Desktop Underwriter” for conventional loan lenders. This “DU” software instantly analyzes the hopeful borrower’s finances, assets, employment history, and credit profile. Freddie Mac also provides a similar program called “Loan Prospector“.

These helpful “Automated Underwriting System” (AUS) programs speed up the mortgage approval process by leaps and bounds.  Modern AUS software follows strict guidelines that are important to understand before loan submission.

1. Income Requirements

Debt-to-income ratios are used (DTI) to evaluate applicant earnings and expenses. Conventional debt-to-income ratios are known as the ‘Front Ratio’, and the ‘Back Ratio’.

What are Conventional Loan Debt-to-Income Ratio Limits?

Debt-to-Income CalculatorTo be eligible for an conventional mortgage, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (28% front ratio). You must also have enough income to pay your housing costs plus all additional monthly debt (36% back ratio). These percentages may be exceeded with compensating factors.

Components of the conforming conventional loan debt-to-income ratio formula include:

  • 28% Front End Debt-to-Income Ratio – The new housing payment may not exceed 28 percent of the applicants combined monthly income.
  • 36% Back End Debt-to-Income Ratio – The new total monthly debt amount, including new home payment, may not exceed 45 percent of the applicant’s combined monthly income. Flexibility up to 50% DTI may be offered for certain applicants with strong compensating factors.
  • 43% “Qualified Mortgage” Debt-to-Income Limit – Although not always required, the back/bottom debt-to-income ratio for the new home loan can’t exceed 43% to be considered a “Qualified Mortgage“.
  • You must adhere to conventional loan debt-to-income ratio requirements through documented income.
  • You must have a history of reliable income for at least two years.

Debt-to-Income Ratio Calculator

2. Credit Requirements

Minimum Credit Score for Conventional LoanConventional loan qualifications are risk-based with a heavy emphasis placed on a borrowers credit profile. The lender will pull the borrower’s credit report from the three major credit bureaus and their credit scores and credit history will be examined thoroughly.

Conventional loan guidelines require borrowers to have a minimum middle FICO score of 620-680 for approval. Applicants must have made all housing payments on time for at least 12 months. Conventional mortgage requirements contain significant waiting periods after a bankruptcy or foreclosure. Conforming loans adhere to the following credit guidelines for approval:

  • The minimum conventional loan credit score is 620-680+ depending on the program.
  • The interest rate is based on credit score, and 720+ obtains the best rate.
  • LTV requirements are based on credit score. Better scores have higher LTV limits.
  • Mortgage insurance requirements are driven off credit score and LTV.
  • Applicant can’t have late payments in the last year.
  • Applicant can’t have outstanding judgments in the last year.
  • At least two years must pass after Chapter 13 bankruptcy.
  • At least four years must pass after Chapter 7 bankruptcy.
  • At least four years must pass after foreclosure.
  • At least two years must pass after short sale with 20% down payment, four years with 10%, seven years with less than 10%.

Can I get an Conventional Mortgage Loan after bankruptcy?

Conventional mortgage loan requirements state that if you have been discharged from a Chapter 7 bankruptcy for four years or more, you’re eligible to apply. If you’ve had a Chapter 13 bankruptcy, you must document that your credit reputation has been re-established for at least two years.

3. Property Requirements

Property requirements for conventional financing are clear-cut compared to other programs like FHA loans. For a property to be eligible, it must have a home appraisal performed by a licensed appraiser from the area.  Conforming appraisal standards adhere to standards set forth by the Uniform Standards of Professional Appraisal Practice (USPAP).

Conventional Loan Property RequirementsConforming appraisal requirements are also strictly regulated by the Home Value Code of Conduct (HVCC), which prohibits lenders or realtors from selecting or influencing appraisers in any way. Under HVCC rules, the appraiser is selected at random.  Once selected, they perform a full appraisal of the subject property to determine its condition and its value.

The appraised value of a home is determined by using a combination of the assessment of the property itself and also by the recent value of comparable properties (comps) in the same area.  Conventional mortgage loan requirements call for at least three comps to the subject property.  For the property to qualify, the appraised value must return greater than or equal to the minimum loan-to-value requirements for the desired conforming loan program.  Minimum LTV requirements for conforming loans are between 80% and 97%, depending on the program and mortgage insurance requirements.

What types of property are eligible?

Depending on the specific program, conventional mortgage guidelines allow you to purchase warrantable condos, planned unit developments, modular homes, manufactured homes, and 1-4 family residences. Conventional loans can be used to finance primary residences, second homes and investment property too.

4. Conventional Loan Limits

What is the maximum amount that I can borrow?

Conventional Loan LimitsThe maximum mortgage amount for conventional mortgage loans are determined by a couple factors.  There is a maximum loan limit and a loan-to-value ratio (LTV Ratio) based upon the home’s appraised value.  Here’s how those are calculated:

Maximum loan amount: The maximum loan amount allowed for an conventional conforming loan varies from county to county. The highest maximum conventional conforming loan for single-family homes is $815,650 right now. The lowest maximum Conventional Mortgage amount available in any county is $424,100. To see what the limit is in your county, check at the link below. Conventional loan limits are listed for most U.S. territories and states.

Maximum financing: Depending on the state where the property is located, the maximum conventional mortgage loan-to-value ratio will be 80% – 97% of the official appraised value of the home or its selling price, whichever is lower.

Conventional Loan-to-Value Ratio Limits for Home Purchase

Residence UsageFixed-Rate Mortgage (FRM)Adjustable-Rate Mortgage (ARM)
1 Unit Primary97% LTV90% LTV
2 Units Primary85% LTV75% LTV
3 Units Primary75% LTV65% LTV
4 Units Primary75% LTV65% LTV
1 Unit Second Home90% LTV80% LTV
1 Unit Investment85% LTV75% LTV
2 Units Investment75% LTV65% LTV
3 Units Investment75% LTV65% LTV
4 Units Investment75% LTV65% LTV

Conventional Loan-to-Value Ratio Limits for Rate-Term Refinance

Residence UsageFixed-Rate Mortgage (FRM)Adjustable-Rate Mortgage (ARM)
1 Unit Primary97% LTV90% LTV
2 Units Primary85% LTV75% LTV
3 Units Primary75% LTV65% LTV
4 Units Primary75% LTV65% LTV
1 Unit Second Home90% LTV80% LTV
1 Unit Investment75% LTV65% LTV
2 Units Investment75% LTV65% LTV
3 Units Investment75% LTV65% LTV
4 Units Investment75% LTV65% LTV

Conventional Loan-to-Value Ratio Limits for Cash-Out Refinance

Residence UsageFixed-Rate Mortgage (FRM)Adjustable-Rate Mortgage (ARM)
1 Unit Primary80% LTV75% LTV
2 Units Primary75% LTV65% LTV
3 Units Primary75% LTV65% LTV
4 Units Primary75% LTV65% LTV
1 Unit Second Home75% LTV65% LTV
1 Unit Investment75% LTV65% LTV
2 Units Investment70% LTV60% LTV
3 Units Investment70% LTV60% LTV
4 Units Investment70% LTV60% LTV

Conventional Loan Down Payment Requirements 

It’s a common belief that 20% down is needed to meet conventional loan down payment requirements, and that’s no longer the case. In reality, the conventional mortgage down payment amount can be as low as 3% for qualified applicants.

Minimum Conventional Mortgage Down Payment Amount

Residence UsageFixed-Rate Mortgage (FRM)Adjustable-Rate Mortgage (ARM)
1 Unit Primary3% Down Payment10% Down Payment
2 Units Primary15% Down Payment25% Down Payment
3 Units Primary25% Down Payment35% Down Payment
4 Units Primary25% Down Payment35% Down Payment
1 Unit Second Home10% Down Payment20% Down Payment
1 Unit Investment15% Down Payment25% Down Payment
2 Units Investment25% Down Payment35% Down Payment
3 Units Investment25% Down Payment35% Down Payment
4 Units Investment25% Down Payment35% Down Payment

For a primary residence, conventional home loans require home buyers to invest at least 3% – 20% of the sales price towards down payment and closing costs. Example: If the sales price is $100,000, the home buyer must invest at least $3,000 – $20,000 down to meet conventional loan down payment requirements.

What will my Interest Rate be?

Conventional loan rates are determined by the program you qualify for and your credit score. You might be asking yourself what is the formula to calculate interest rates? Interest rates are driven off of Mortgage Backed Securities (MBS) which are commonly referred to “mortgage bonds”. These value of these bonds determine whether the interest rates rise or fall. Your final rate will determine your payment using the standard calculate mortgage payment formula.

What is a Non-Conforming Loan?

In contrast, conventional non-conforming loan programs don’t meet loan requirements set forth by the FHFA, Fannie Mae, or Freddie Mac and they aren’t backed by any government agency. Before 2008, non-conforming home loans were like the Wild Wild West. Readily available non-conforming loan options were the single largest contributor to the housing market collapse, and most of them suffered the same fate as the lenders that promoted them. Suspect non-conforming loan programs included sub-prime, stated income, no income verification (NI), no asset verification (NA), and even no documentation mortgage products (NINA).  No job or credit score was necessary to buy a home.

Lending regulations tightened after the financial crisis, hence the surviving non-conforming mortgage loans and non-conforming loan lenders are now required to document applicant income and credit history. As a result, today’s non-conforming home loans are less risky. Jumbo non-conforming loans are a popular example. Non-conforming jumbo loan requirements are not much different than conventional conforming loans.

Non-Conforming Loan Requirements

Non-conforming loan requirements can vary as greatly as the lending institutions that offer them.  That’s exactly what makes them non-conforming. Qualifications that can vary from program to program include maximum loan amounts, minimum credit scores, employment history, property loan-to-value requirements, bankruptcy wait times, and countless others.

One consistent thing among nonconforming loans is that new regulations mandate supporting documentation be included with new applications.  Most say that the days of stated-income and no-documentation loans are behind us, although there are recent rumblings of some smaller lenders still offering them on a limited scale.

Conventional Conforming Loans vs. Non-Conforming Loans

Straightforward, common sense conventional loan requirements combined with low interest rates and minimal fees are considered the signature qualities of conforming loans. In contrast, non-conforming conventional loans have often encompassed nearly every risky lending practice known to man until recently. Conforming vs. non-conforming conventional loan requirements related to an applicants credit score and history, debt-to-income ratio and loan-to-value ratio are explained here

What kinds Conventional Loan Programs are offered?

  • Fixed-Rate Loans – Most Conventional Mortgages are fixed-rate mortgages. In a fixed rate mortgage, your interest rate stays the same for the entire loan period. With a fixed rate Conventional Mortgage, you always know exactly how much your monthly payment will be. Contact us for today’s free Conventional mortgage rates.
  • Adjustable Rate Loans – With a conventional adjustable rate mortgage (ARM), the initial interest rate and monthly payments are low, but these may change during the life of the loan. Conventional Loans mainly use the Constant Maturity Treasury Index (CMT) or the London Interbank Offered Rate Index (LIBOR) to calculate the changes in interest rates. Conventional ARMS are offered with initial fixed rate periods of 3 years, 5 years, 7 years and 10 years.
  • 30-Year Conventional Loans – The most popular home loan historically is the conventional 30 year mortgage.  Low mortgage fees, no mortgage insurance requirement (with 20% equity) and solid qualifications are their trademark.  30-Year conventional mortgage rates are frequently the best value available, especially when it’s lower fees are factored.
  • 15-Year Conventional Loans – Because mortgage rates have been so low recently, more home buyers and homeowners have opted for the 15-Year conventional mortgage.  The 15-year loan pays down much more aggressively than the 30-year loan, and 15-year payments are often the same price as a 30-year a few years ago.

Why choose a Conventional Loan?

  • Conventional mortgages are ideal for borrowers with excellent credit and a substantial down payment.
  • Conventional loan qualifications use income expanded qualifying ratios with compensating factors.
  • There are no prepayment penalties for an conventional loans.
  • A conventional loan can be used for the purchase of a Primary Residence, Second Home or Investment Property.
  • A Conventional Mortgage is available all areas of the country, provided a market exists for the property and the home meets minimum property standards.
  • A Conforming Loan may be used to purchase or refinance a new or existing one to four family home in urban and rural areas, including manufactured homes on permanent foundations.
  • Conventional Mortgages are offered at terms of 10, 15, 20, 25, 30 and 40 years. The terms of 15 and 30 years often carry the lowest interest rates.

Whether you’re buying a home or want or refinance your mortgage, a Conventional Loan might be right for you. If you’re unsure about your credit rating, or have concerns about a down payment,  conventional mortgages can give you piece of mind with super low closing costs and flexible payment options.

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