Conventional Mortgage Loans

Key Takeaways:

  • A conventional mortgage is a home loan that is not offered or secured by a government entity.
  • Available through a private lender or the two GSEs – Fannie Mae and Freddie Mac.
  • Conventional mortgage rates tend to be higher than those of government-backed mortgages, such as FHA loans.

A conventional mortgage or conventional loan is a type of home buyer’s loan that is not secured or offered by a government entity.

Instead, traditional mortgage loans are available from private lenders such as banks, credit unions, and mortgage companies.

Conventional mortgage rates are typically better.

Traditional mortgage loans usually have a fixed interest rate, which means that the interest rate does not change throughout the loan period.

Conventional mortgages are not guaranteed by the federal government, with the result that banks and creditors typically have stricter lending requirements.

Some government agencies that provide bank mortgages include the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA), and the USDA Rural Housing Service.

However, there are requirements that borrowers must meet in order to qualify for these programs.

About Freddie Mac and Fannie Mae

Some mortgages can be guaranteed by two government-sponsored enterprises (GSEs):

  • The Federal Home Loan Mortgage Corporation (Freddie Mac)
  • The Federal National Mortgage Association (Fannie Mae)

Freddie Mac and Fannie Mae buy their mortgages from lenders to sell to investors; in short, their job is to make mortgages widely available.

Freddie Mac has provided more than $11.6 trillion in home loans for more than 80 million customers. Founded in 1938, Fannie Mae introduced the 30-year, fixed-rate mortgage loan in the 1950s.

There are caveats to conventional loans such as ‘jumbo‘ mortgages when loans that are larger than the loan limits set by the GSE’s are made.

Still, jumbo loans are considered conventional mortgages despite being non-conforming.

Note: The baseline conforming loan limit for 2022 is $647,200.

In most US properties conforming loan limits are currently higher than $548,250 which covers most people currently in the market seeking loans.

Conventional Loans come with several perks and some misconceptions that do need clarifying.

How a Conventional Mortgage Works

Over the years, lenders have tightened the qualifications of traditional home loans but the basic requirements stayed the same.

Prospective borrowers must complete an official mortgage application (and usually pay an application fee) and then provide the lender with the necessary documents to conduct a thorough background check, credit history, and current credit assessment.

Requirements for a Conventional Mortgage

Contrary to popular belief you don’t need a 20% down payment for a conventional loan. You can get approved for a conventional mortgage loan with as little as a 3-5% down payment.

There are perks that in the long run will save you some money if you can manage to produce 20% upfront.

One of those perks is that the Private Mortgage Insurance (PMI) policy is waived upon a 20% down payment.

Example: On a $100,000 loan you could typically expect to pay 0.5% to 1.2% of the entire loan amount on an annual basis for a Private Mortgage Insurance fee; meaning that if your PMI fee was 1%, you’d be spending $83.33 per month or an additional $1,000 a year on a policy that protects the lender if you are unable to pay your mortgage.

The PMI does drop off if you can’t place the 20% down payment once you have 22% equity in your home, but until then you’re paying for a policy that otherwise could’ve been totally avoided.

When applying for a conventional mortgage, you’ll need:

  • Proof of income. This can include two years of federal tax returns, a quarterly statement of assets, two years of W-2 statements, and pay stubs.
  • Assets. You’ll need to show bank statements and investment account statements to prove that you do have funds available for the down payment.
  • Employment verification. The lender may call your employer to confirm your employment and may want to contact previous employers too.
  • Documentation. Other documentation may be required such as your driver’s license, state ID card, and your social security number to do a credit check.

Additionally the premise of the loan matters just as much, loans are typically approved under the premise that your purchase is because you’re:

  • Planning on occupying it yourself (owner-occupied)
  • Buying a second home for yourself
  • Purchasing an investment property

The last hurdle in your way for getting approved for a conventional loan is making sure you have a credit score generally above 640 and higher.

Previous things like bankruptcy can cause delays of 4-6 years for applications and in cases of foreclosures 7 years.

>> has 8 ways to drive up your credit score.

The Pros

Conventional loans offer heaps of benefits and are typically the most used type of home loan. Conventional loans can come in fixed rates, adjustable rates, or hybrids all with their own unique value proposition.

Wells Fargo for example has several options to choose from for conforming conventional loans, like 30 years fixed rate, 20 years fixed rate, 15 years fixed rate, 7/1 ARM, 5/1 ARM, that all offer APR rates of as little as 5%.

Aside from a predictable conventional loan rate, lower APR, and the unrequired PMI if paying 20% down, NPS liabilities are not included in the decision-making for loan approval.

The Non-Purchasing Spouse (NPS) is left out of the decision-making process, as opposed to government loans that include your nonpurchasing spouse’s liabilities into the debt to income ratio.

An additional benefit is lower closing costs in general.

Conventional loans have fewer requirements than other types of loans meaning the borrower can have an easier time covering origination fees, legal fees, appraisal/home inspection fees, title insurance, and escrow deposits.

The Cons

When you’re looking for the pros and cons of conventional mortgages it’s fairly tough to find the cons.

One, in particular, is that conventional mortgages are a FICO score-driven model, meaning that credit score is taken into consideration for your conventional mortgage loan rates and Private Mortgage Insurance Fees.

Tip: You can find out what your credit score is here.

In the case of being under a 660 credit score, a better option may be to actually get approved for an FHA loan due to the interest of saving thousands in unnecessary fees.

The Bottom Line

When searching for the Pros and Cons of Conventional Mortgages, for the average consumer with a healthy credit score of 660 and above (740 and above earning you prime rates) Conventional Loans stand out the most.

This is because of their automatic PMI termination once the loan balance reaches 78% of the original value.

>> breaks down the home buying process here.

  • Important: Remember to do your due diligence and investigate further, talk to the professionals, and ask questions to make your home buying experience run as smoothly and happily as possible.

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    Lorien is the Country Manager for Financer US and has a strong background in finance and digital marketing. She is a fintech enthusiast and a lover of all things digital.

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    Last Updated: June 16, 2022

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