Conventional Mortgage Basics

What are Conventional Loans?

Conventional loans are not insured by the federal government, and are split into two categories: conforming and non-conforming.

Conforming conventional loans are backed by the Government-Sponsored Enterprises (GSEs) Freddie Mac (Federal Home Loan Mortgage Corporation) or Fannie Mae (Federal National Mortgage Association). They are issued to borrowers who meet all of the GSEs’ income, credit, debt, and other requirements.

Non-conforming conventional loan borrowers do not meet the requirements set forth by the GSEs. This can be for a number of reasons, but a typical example is a jumbo loan: a mortgage loan amount so large it exceeds regional GSE maximums. Non-conforming conventional loans are usually accompanied by higher rates than their conforming counterparts.

Conventional Mortgage Requirements

Because non-conforming conventional loans vary, the minimum requirements below are for conforming conventional programs only, and reflect GSE standards.

  • Down Payment: 5% or greater.
  • Credit Score: Varies; below 620 unlikely.
  • Debt-to-Income Ratio (DTI): 45% or lower
  • Total Debt must not be too heavy.
  • Loan-to-Value Ratio (LTV): 95% or lower (90% for condominiums)
  • Loan Limit (max allowable loan amount): Up to $729,750 in higher cost areas and as low as $417,000 in lower cost areas. Varies by region; find yours here.
  • Private Mortgage Insurance (PMI) is required with a down payment below 20%.
  • Complete documentation of employment history, income, and assets.

Conventional Private Mortgage Insurance Facts

  • No upfront premium like those required by government loans.
  • Monthly Premium payment.
  • Not required if down payment is 20% or greater on any loan term length.
  • Canceled automatically after LTV reaches 78% (or 22% equity).

Conventional Loan Types

  • Fixed-Rate: Your mortgage rate is fixed for the life of the loan.
  • Adjustable-Rate: Your mortgage rate will fluctuate depending on a predetermined index and market shifts.