Conventional loans may offer lower interest rates than those insured by the government. You’ll need good credit, a steady income, and the funds to cover a down payment to qualify for one of these loans. They can also be faster to close than their government-backed counterparts. Learn more about conventional mortgages and their requirements.
What Is a Conventional Mortgage?
Conventional loans include both conforming and non-conforming loans. A conforming loan meets the guidelines of Freddie Mac and Fannie Mae. These are government-sponsored enterprises—private companies that were started by the government. They back mortgages to reduce the risk to lenders. Freddie Mac and Fannie Mae have guidelines for their mortgages. One of these is that the loans have limits. The conforming loan limit is $647,200 in 2022, up from $548,250 in 2021, in most areas of the United States. The limit is higher in areas with a higher cost of living. The maximum loan size for a high-cost area is $822,375 in 2021, increasing to $970,800 in 2022. Conforming mortgages can have a fixed or adjustable interest rate. A fixed interest rate means that your rate stays the same for the length of your mortgage. An adjustable rate mortgage means that the rate can go up or down.
Conforming Conventional Loan Requirements
Fannie Mae and Freddie Mac require that all borrowers meet certain credit scores, income levels, work history, debt-to-income ratios, and minimum down payments. A few of the items a lender will look at when considering financing include:
Your total monthly expensesYour total gross income per monthYour employment historyYour credit score and payment historyYour assets, including checking, savings, and retirement accounts
Your mortgage lender might ask for more information after personally reviewing your application. Some basic requirements for conforming loans include:
A minimum credit score of 620Total debt-to-income ratio of 45% or lessA down payment of 3% or moreDown payment funds coming from a documented asset sourceIncome limits for some Fannie Mae and Freddie Mac loansA certain amount of cash reserves depending on your credit score and debt-to-income ratio
Private Mortgage Insurance
Fannie Mae and Freddie Mac mortgages may also require that you purchase private mortgage insurance (PMI). PMI protects the lender if you stop paying your mortgage and your home goes into foreclosure. It’s a monthly fee added to your mortgage payment. PMI is often required if you make a down payment of less than 20% of the purchase price. You can cancel your PMI once you reach 20% equity in your home. Your lender must cancel your PMI when you reach 22% equity in your home or when you reach the midpoint of your loan’s payment schedule, whichever comes first.
FHA vs. Conforming Conventional Mortgages
FHA loans require that a property meet strict guidelines as far as price, location, and condition. Conventional lenders aren’t bound by these same rules. FHA loans also have less stringent credit score requirements than conforming mortgages. You might qualify with a score as low as 500 to 580. You most likely won’t be hit with extra fees or higher rates if your credit score is less than average. Conventional loans can be used to finance just about any type of property. Some condo complexes and certain houses aren’t approved for FHA financing. Either mortgage option could work for many borrowers. Contact lenders and discuss both to find out which is the best fit for you. Lenders can help you determine which option is best for your financial situation and homeownership needs.
