Conventional Loans| The Facts


What is a Conventional Loan?


A Conventional Loan is a type of Mortgage that isn't part of a specific Government Program - like the Federal Housing Administration (FHA) or the Department of Veterans' Affairs (VA) loan programs. 

You may also see Conventional Loans be referred to as "Conforming Loans" from time to time. This simply means that the loan conforms to Fannie Mae and Freddie Mac's underwriting requirements and loan limits. Note however that only about half of all Conventional Loans conform to Fannie Mae and Freddie Mac's requirements. This is typically due to the size and terms of the loan, which will be unique to every borrower. These are then referred to as Non-Conventional Loans.

Common Examples of Non-Conventional Loans:
  • FHA Loans - Loans aimed at borrowers who can't afford a sizable down payment, have high debt-to-income ratios, or have less than great credit.
  • VA Loans - Loans reserved for active-duty Military and Veterans.
  • Jumbo Loans - Loans intended for borrowers with excellent credit and looking to finance loan amounts greater than the amount guidelines allowed by Fannie Mae or Freddie Mac.

How Can You Qualify for a Conventional Loan?

1. Be Able to Make a Sizable Down Payment
  • The Standard Down Payment for a Conventional Loan is anywhere from 3% to 25% of a home's value (depending on the borrower's credit and financial conditions). 
    • For example, lets say you needed to put 8% down on a home mortgage of $150,000. Some quick math (150000 * .08) shows that amount would come out to $12,000.
2. Prove a Stable Income
  • To qualify for a Conventional Loan, your monthly Mortgage payments and monthly Non-Mortgage debts must fall within certain ranges. Compared with/against eachother, these are commonly referred to "ratios", and borrowers need to meet certain ratios as a requirement in the approval process. 
    • For example, we might require your monthly mortgage payments (including taxes and insurance) not to exceed 25% of your gross monthly income (GMI). This means if you have $4,000 per month in GMI, your monthly Mortgage payment cannot exceed $1,000. Additionally, while your Mortgage payment may not be able to exceed 25% of GMI, you may also have to limit the total of your Mortgage payment, plus all other monthly expenses (like utility bills, student loans, car payments etc) to 35% of your GMI. We will always work with you to make sure 
3. Have a Good Credit Score
  • Always try to pay those bills on time! Your credit score plays an integral role when trying to qualify for a Conventional Mortgage. The better the score, the better the chance of approval for a loan. 
    • This could also potentially mean a lower monthly Mortgage payment! 

Some Benefits of Getting a Conventional Home Loan
  • Faster Home Loan Processing - Conventional Loans tend to be more streamlined, which could lead to a faster, less-complicated, approval process.
  • Reduced or Eliminated Mortgage Insurance Premium (MIP) - Since a Conventional Loan usually requires a higher down payment vs a Government Insured Loan, its more likely that you could avoid an MIP. Note that in order to avoid an MIP, you would need to put down at least 20% of the home's value for the Mortgage. If you put down less than the 20%, you will still need some form of Mortgage Insurance, but keep in mind the closer you go to 20%, the lower the likelihood of the premium payment each month. 
  • Lower Mortgage Interest Rates - As we mentioned above, the better your credit score, income ratios, and other factors, the better your chance at a more attractive interest rate (which means a lower monthly mortgage payment!). 

If you've read this far - lets talk! We can answer any other questions you might have and ensure you have the best type of Mortgage Loan for your needs.



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