Exploring Conventional Loans
A conventional mortgage is considered a conforming loan which means it has met the required guidelines for Fannie Mae or Freddie Mac. Since Fannie Mae and Freddie Mac buy these mortgages off the banks in order to provide the banks with liquid funds to keep loaning to consumers, it is imperative the banks follow Fannie and Freddie's guidelines. Conventional mortgages usually have higher interest rates than government loans such as FHA and VA but tend to be more favorable due to the fact you're not stuck with mortgage insurance for the life of the loan or an expensive funding fee. Conventional mortgages are considered to be one of the most popular types of mortgages.
Types of Conventional Mortgages
- Purchase Loan
- Cash-out Refinance
Conventional Mortgage Requirements
- Minimum FICO of 620 (may vary by lender)
- Minimum Down Payment of 3% (may vary by loan program)
- Housing Expense/Debt-to-income Ratio: 45%/50%
Conventional Mortgage Loan Limits
The 2022 baseline conforming loan limit is $647,200 for most counties which is $98,950 higher than it was in 2021. In certain high-cost areas where the median home value exceeds the conforming loan limit, the ceiling for the loan limit can be as high as $970,800.
Private Mortgage Insurance
Much like FHA's mortgage insurance premium, conventional loans require the borrower to pay monthly mortgage insurance (which is based on a percentage of the loan amount) if the down payment is less than 20%. This is insurance for the lender in the event that the homeowner defaults on the mortgage. With conventional loans, the homeowner can request that the lender removes the mortgage insurance when the loan-to-value reaches 80%. When the loan-to-value reaches 78%, the lender must remove the mortgage insurance.