Conventional Loans

Conventional Loans

A conventional mortgage is any type of home buyer’s loan not offered or secured by a government entity but made available through a private lender (such as a banks, credit union, or mortgage lender) or the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This means that loans offered through entities such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service are excluded.

Conventional loans are often incorrectly referred to as conforming loans. While there are similarities, the two are completely distinct categories. With conforming mortgages, the underlying terms and conditions meet the funding criteria of the aforementioned Fannie Mae and Freddie Mac. Most important among those is the dollar limit, set annually by the Federal Housing Finance Agency (FHFA):

In 2019, within the majority of U.S. States, a loan may not exceed $484,350. So while all conforming loans are conventional, not all conventional loans qualify as a conforming loan. For example, a Jumbo mortgage loan of $900,000 is a conventional mortgage but does not fall within the guidelines of a conforming mortgage because it surpasses the total amount that would allow it to be backed by Fannie Mae or Freddie Mac.

Since the subprime mortgage meltdown of 2007, lenders have tightened their qualification standard for loans. For example, mortgages not requiring verification or down-payments are no longer available, and for good reason. Despite this, most of the basic requirements haven’t changed. Potential borrowers need to complete a mortgage application and then supply the lender with the necessary documents to perform an extensive check on their background, credit history and current credit score. In addition, Conventional mortgages are usually the best or only recourse for buyers who want the residence for investment purposes, a second home, or are interested in a property priced over $500,000.

You should have no difficulty qualifying for a Conventional Loan if you have established decent credit and on a solid financial footing. More specifically, the ideal candidate should have:

  • A credit score of at least 680, although ideally, above 700. The higher the score, the lower the interest rate you will be offered on your loan. The best terms are usually reserved for those over 740.
  • An acceptable debt-to-income ratio (DTI). This ratio is the sum of your monthly obligations compared to your monthly income. That number should be around 36% and no more than 43%.
  • An amount of at least 20% of the home’s purchase cost readily available as a down-payment. Lenders may accept less but if they do they often require that borrowers take out private mortgage insurance and pay its premiums monthly.