What is a Conventional Loan?
A Conventional home loan is a loan backed by Fannie Mae and Freddie Mac- two agencies that help standardize the mortgage industry- instead of a government agency. It is also known as a Conforming loan as it conforms to the standards set by these two agencies. For the borrower, this means great rates and flexible qualifying guidelines. Conventional loans are the most popular type, reaching their ten year high market share in in the final quarter of 2018, making up 76.9% of all home loans.
A Conventional loan can require as little as 3% down. Because this type of loan is backed by a private lender rather than the government, if you put less that 20% down you are required to purchase Private Mortgage Insurance (PMI) to mitigate the risk to the lender. The good news is, you can cancel the mortgage insurance after your home equity reaches 20%. As of 2020, the maximum conforming loan limit for one-unit properties is $510,400. (or $765,600 in high-cost areas)
Who is a Conventional Loan Right For?
Conventional financing appeals to a wide demographic but this type of loan is best suited for those with a good credit score. While you can still qualify with a lower score, there may be higher costs associated with your mortgage. A Conventional loan can be used for primary residences, second homes, or even investment properties.
If you have good credit and money for a down payment, a Conventional loan may be the best option for you. In most cases, a credit score of at least 620-640 and a maximum debt-to-income ratio of 45% is required to secure a Conventional loan. Keep in mind exceptions can often be made and other loan options can be explored if you do not meet these requirements.
Conventional Home Loan Benefits
- Down payment as low as 3%
- Available in Fixed Rate or Adjustable Rate (ARMs) options
- Various loan term options available
- No monthly mortgage insurance required with a down payment of at least 20%
- Lower mortgage insurance costs than an FHA mortgage
- Mortgage insurance can be cancelled when home equity reaches 20%
- Can use for primary residence, second homes or investment properties
Are you ready to start your homebuying journey? Speaking to a loan officer is a great place to start! If a Conventional loan is not right for you, Lennar Mortgage can present you with an array of home loan options to help you reach your goal of homeownership.