What is a Conventional Mortgage?
Mortgages come in all shapes and sizes. But the most common home loan is called a conventional mortgage. Also known as a conforming loan, conventional mortgages are not insured or guaranteed by the federal government and must adhere to the standards set by Fannie Mae and Freddie Mac, which are the governing bodies for conventional mortgage loans across the United States.
Conventional loans have limits set by Fannie Mae and Freddie Mac. These limits change from region to region and are based on real estate prices and affordability. More information can be found here: Conforming Loan Limits.
Conventional Loan Requirements
Conventional loans have stricter credit and income requirements than government-backed loans, such as VA and FHA. But like federally-insured loans, conventional mortgages allow buyers to put as little as 3 percent down, which makes this form of financing a strong competitor to FHA.
The typical debt-to-income (DTI) ratio on a conventional mortgage cannot exceed 45%, including the mortgage payment. However, exceptions can be made. For example, borrowers with excellent credit and high cash reserves may qualify for a DTI as high as 50%. Likewise, borrowers with a few credit dings and low cash reserves could have a lower DTI.
Benefits of a Conventional Loan
Anytime a homebuyer puts less than 20% down on a home, they must pay PMI, or private mortgage insurance. One of the biggest benefits of a conventional mortgage is the fact the PMI goes away once the home reaches the 80 percent loan to value. Unlike an FHA loan in which mortgage insurance remains for the life of a loan, conventional loan borrowers only pay PMI for a relatively short period of time.
Other benefits include:
• Lower costs
• Flexible lending terms
• Looser appraisal standards
• And more.
For more information on whether a conventional mortgage is right for you, contact us today at (760) 930-0569.