What is a Conventional Loan?
A conventional loan is a mortgage that is not backed by any government agency such as the Federal Housing Administration. The lender issuing the loan is assuming the risk.
Conventional loans also meet the requirements of Fannie Mae and Freddie Mac. Most conventional loans are issued by private lenders who then sell the loan to one of these Government Sponsored Entities (GSE’s).
Conventional Loan Highlights
Conventional loans come with Fixed rates or an Adjustable rate.
Conventional loans can be used to purchase a primary residence or investment property.
Down payment typically of 5% – 20%
Conventional 97 has a 3% down payment
640 Credit score minimum
PMI required for loans with under 80% LTV
A conventional loan may be a good fit for you if…
Your credit score is 640 or higher,
Have a down payment of 10%+
Want to avoid PMI by putting at least 20% down
Have a high income
Purchasing a home above the FHA loan limit
Conventional Loan Down Payment
There are no standard requirements for conventional loans. The minimum down payment for a conforming loan is usually 5% of the sales price. A conventional 97 loan has just a 3% down payment. Conventional loans with less than a 20% down payment and the mortgage is greater than 80% of the value of the home a private mortgage insurance policy is required.
A private mortgage insurance policy, or PMI, is an insurance policy that compensates the lender the difference between the 80% threshold and the amount of down payment should the loan ever go into default.
Conventional Mortgage Benefits
High loan limits (up to $424,100)
No private mortgage insurance (PMI) with 20% down
Available for second homes and investment properties
PMI cancels when the LTV reaches 78%
Cheaper PMI than FHA Conventional
97% LTV with 3% down
Conventional Mortgage Disadvantages
Credit score requirement is higher than FHA (640+)
Higher down payment required compared to FHA
Higher interest rates
More difficult to qualify for