Conventional

What is a conventional mortgage loan? 

A conventional loan is one of the most typical mortgage loans available to either purchase or refinance a home. Conventional loans are also referred as "conforming" as they conform to Fannie Mae and Freddie Mac's guidelines. The nature of the conventional loan is that it is made available by a private lender and thereby not insured by either the FHA or guaranteed by the VA or the USDA. The maximum amount on a conventional loan in most counties is $417,000 with the exception of high cost states such as California and New York.

Types of conventional loans

Conventional loans are offered in fixed and adjustable rates. Also, there is a high availability of terms, such as 10, 15, 20, 25 and 30 years. However, it may not be unusual to hear of lenders originating 40 and 50 year conventional loans. In fact, some modifications done through the HAMP program are actually 40 year loans.

What are the benefits of a conventional loan? 

• Conventional loans usually offer the best rates and closing costs. 

• Lenders are not bound by some of the restrictions presented on government-insured mortgages.

•  Conventional loans may have faster closing times than some FHA and USDA mortgages.

• If a conventional loan requires Private Mortgage Insurance (PMI), the borrower can request to have it taken off after the home achieves a 20% equity position (LTV=80%). However, PMI automatically drops off at a 72% LTV for the remainder term of the loan. 

What are the drawbacks of a conventional loan? 

• Borrower qualifications are tougher in terms of income, credit and down payment. 

• Borrowers are required to provide a larger down payment on a 30-year conventional loan, with the minimum being 5% of the loan amount. 

• Stricter credit requirements. Though this can vary from lender to lender,  but the usual minimum FICO on a conventional loan is 680. Keep in mind that the FICO on a conventional mortgage can determine better or worse pricing of the rate. 

• PMI payments are highly sensitive of the borrowers FICO score. 

• Job stability and asset documentation may actually be more scrutinized.

When should you consider a conventional loan? 

• On a purchase, if you are able to provide a high down payment of 15% or more. Preferably,  20% to avoid PMI.

• On a refinance, when the existing loan is an FHA mortgage and the borrower wishes to cease paying mortgage insurance payments. Unlike on conventional loans, the FHA's equivalent of the PMI, called the MIP, stays throughout the life of the loan. 

• Solid work history and steady, 2 or more years of verifiable income. 

• Your credit history is solid. No derogatory information affecting your scores.

• Guidelines on derogatory credit history such as foreclosure, short sale and bankruptcies are different in conventional and government loans. Click here to learn more about derogatory credit.

For more questions about conventional loans, click here.