Conventional loans (also sometimes called Conforming loans) are mortgages made by lenders that meet requirements outlined by Fannie Mae and Freddie Mac. These mortgages must meet conventional loans limits, down payment requirements, debt to income ratios and other underwriting guidelines.
Both Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored entities created by Congress to purchase conforming mortgage loans and resell them on the secondary market.
The current 2020 Conforming Loan Limits for most locations in the U.S. is capped to $510,400 – with the exception of some high costs locations like California. These locations are capped at $765,600. Buyers in search of larger loan amounts should read more about Jumbo Loans here.
Like many mortgage programs today, Conventional loans have certain advantages and disadvantages. Conventional loans generally require a larger down when compared to FHA loans, USDA or VA. Buyers are currently required to put down a minimum of 3-5% in order to obtain a Conventional loan. Please note, this down payment requirement only applies to owner-occupied primary homes.
If you are looking for a second home or investment property Conventional loan, you can expect this down payment requirement to be 10-20%. One benefit is Conventional loans do not have the upfront mortgage insurance premium (MIP) requirement like all Government home loan programs.
All Government loans require this, and the fee can range from 1 -3.5% of your loan amount. However, Conventional loans may require monthly private mortgage insurance (PMI) for down payments under 20%.
Conventional Loan Mortgage Terms:
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Conventional loans come with a verity of different mortgage payment terms available. Home buyers can pick Adjustable Rate Terms or Fix Rate Terms. Adjustable Rate Conventional loans come in a 5 year, 7 year and 10 year terms. Fix Rate Conventional loan terms include 10 year, 15 year, 20 year, 25 year and 30 year term.
What mortgage is best for you?
The answer depends on how much money you have available for a down payment, credit profile, etc. If you have 5% or more to put down on your new home, the Conventional home loan should certainly be looked at closely. If your saving for the down payment is limited, or you want to retain more savings, the Government home loan mortgage options like FHA, VA or USDA, should be looked at closely. Buyer’s that require larger loan amounts can learn more about Jumbo mortgage options up to 95%.