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Conventional Mortgages - Everything You Need to Know
If you’re looking to purchase or refinance, learn more about conventional loans and find out why over 60% of all mortgages in the US are conventional. From appealing rates to no private mortgage insurance, many borrowers from first-time homebuyers to investors take advantage of this type of loan.
What’s a Conventional Loan?
Conventional loans, or non-government loans, are not insured or guaranteed by any government agency like FHA, USDA or VA type loans are. Conventional loan programs fall into three basic categories:
- Conforming loans - meets guidelines and loan size limits for the area.
- Jumbo loans - exceed loan size limits for the area.
- Non-conforming loans - does not meet conforming guidelines.
Many borrowers getting home loans can qualify for a conforming loan. This type of loan has the best rates.
Rates for Conventional Loans
Mortgage interest rates vary depending upon if you're purchasing a home or condo as your primary residence, second home, vacation home or an investment property.
Every loan program has different requirements, which we’ll go over the main ones below.
One of the significant differences between conventional loans vs. FHA is that FHA is only for your primary residence. If you're not going to live in the property as your primary residence, you'll need a conventional mortgage.
Conventional Loan Requirements
There are hundreds of conventional programs, and each one has their own individual guidelines. We’ll go over the general requirements here:
Conventional Mortgage Limits
For a first mortgage, there’s a maximum conforming loan limit. If your loan size is larger, you’ll have to get a jumbo loan. Once a year, conforming loan limits change. Here are the single-family and multi-unit loan limits for 2020:
- 1 unit: $510,400
- 2 units: $653,550
- 3 units: $789,950
- 4 units: $981,700
Some of the states in the US like, Colorado, Tennessee, and Florida are considered high-cost areas, so their limits are higher:
- 1 unit: $765,600
- 2 units: $980,325
- 3 units: $1,184,925
- 4 units: $1,472,550
If you require a loan that exceeds the limits above, you’ll need a jumbo loan.
Conventional Loan Down Payment
The required down payment depends on what type of property you’re purchasing. If it’s your primary residence, you don’t have to put as much down.
Primary residences: down payment is as low as 3% down (which is less than an FHA loan of 3.5%). There are also conforming loans with a requirement of only 5% down.
Second homes: you'll need a 10% down payment.
Investment properties: for a 1 to 4-unit investment property, you’ll need to put down 15% to 25%.
Private Mortgage Insurance (PMI): If your down payment is less than 20%, you’ll have to have Private Mortgage Insurance until you gain at least 20% equity in your home. So, when you’re comparing a conventional loan to an FHA loan, keep in mind that the PMI never comes off an FHA loan.
Many of our borrowers at Homestead Mortgage come to us because they have an FHA loan and want to refinance to a conventional loan to remove private mortgage insurance.
Besides the down payment, another big piece of the puzzle is credit.
The credit requirements for a conventional loan are stricter than those for an FHA loan.
The minimum credit score can be as low as 620.
Those borrowers with credit scores in the 6’s may need to have more savings in their bank account (reserves) to qualify for a loan.
Significant Derogatory Credit Events
When your loan officer at Homestead Financial pulls your credit, they will go over it with you. If you’ve had credit problems in the past, they can go over a plan of action and discuss anything you may need to take care of.
Disputes: you can’t have any disputes on your credit report. You’ll need to remove them before getting your loan.
Judgments and liens: must be paid off before closing or proof that they are paid off.
Bankruptcies: If you’ve had a bankruptcy, you’ll need to wait four years after dismissal to get another conventional loan. If there are extenuating circumstances, this time may be shorter.
Foreclosures: You’ll need to wait seven years from the completion date of the foreclosure action.
Non-conforming Credit Requirements
Even with a lower score or derogatory credit events, you may still be able to qualify for a non-conforming loan. Your loan professional at Homestead Financial Mortgage is here to help you.
How much income you’re required to have is relative to:
- Your monthly debts
- Your loan size
You may have heard of the term DTI. That stands for the debt-to-income ratio. It’s the ratio of your monthly debts, including credit cards, car payments, and mortgage payment compared to your gross monthly income. Here's an example:
- Total monthly debts - $2,600
- Gross monthly income - $8,000
The calculation would be $2,600 divided by $8,000 = 32.5%
The maximum DTI for most conventional loan programs is between 36% to 45%, depending upon your credit.
If you receive child support, you may be able to count it in your income, so check with your mortgage loan originator.
FHA is more lenient on DTI, so if you don’t qualify for a conventional loan or a non-conforming loan, an FHA might be the perfect fit.
You can get a convention first mortgage loan on properties that are one to four units. And unlike an FHA loan, you can get them on investment properties too.
Eligible Property Types
- Single-family homes
- Manufactured homes on land – not in a park
Ineligible Property Types
- Vacant land
- Farms and ranches (agriculture properties)
- Bed and breakfasts or Airbnb
- Condo-tells or co-op hotels
- Single-wide manufactured homes
Great Conventional Loans
As you can see, there’s a lot to know about conventional mortgage loans and a variety of options. Since Homestead Financial is a direct lender, we handle your loan from start to finish. That means we take your application, gather your documentation, present it to our in-house underwriter, close and fund your loan. There’s no middleman. Our entire team is here to help you get the loan you need. For purchases and refinances, trust the professionals at Homestead Financial. Contact us today.