What Is A Conventional Loan?

A conventional mortgage loan is not directly insured by a government program. Most conventional loans are also “conforming” loans, which simply means that they meet the requirements for Fannie Mae or Freddie Mac. Both are government-sponsored enterprises that purchase mortgages from lenders and sell them to investors.

Conventional mortgages are available with several different term options with most people choosing between 15-year and 30-year terms. Before choosing this loan type, make sure you meet common lender requirements and review the pros and cons.

How Does A Conventional Loan Work?

Conventional loans work like most mortgages. A borrower applies to a lender for a specific loan amount. The lender then reviews the borrower's qualifications and approves the loan. After the loan is finalized and the borrower closes on their new home, they’ll repay the loan with monthly installments.

Because there are several different sets of guidelines that fall under the umbrella of “conventional loans,” there’s no single set of requirements for borrowers. However, in general, conventional loans have stricter credit requirements than government-backed loans like Federal Housing Administration (FHA) loans.

Types Of Conventional Loans

As mentioned above, different types of conventional mortgages are available to meet different needs for borrowers. Some of the common types of conventional mortgages include:

• Fixed-rate loan: Interest rates stay the same over the life of the loan.
• Adjustable-rate mortgage (ARM): Interest rates can change over the life of the loan.
• Conforming loan: The loan amount must stay within the loan limits set by Fannie Mae and Freddie Mac.
• Non-conforming or jumbo loan: Those who need to borrow more than the conforming loan limit can use a jumbo conventional loan.

If you’re considering a conventional mortgage, consult with your mortgage lender to determine which type of conventional loan is right for your financial situation.

Conventional Loan Requirements

As with any type of mortgage loan, you’ll need to meet certain qualification requirements if you want to buy a home with a conventional loan. Let’s take a look at what you’ll generally need to qualify for this type of home loan.

Down Payment

It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%. However, the conventional loan down payment requirement can vary based on your personal situation and the type of loan or property you’re getting:

• If you’re not a first-time home buyer or making no more than 80% of the median income in your area, the down payment requirement is 5%.
• If the house you’re buying is not a single-family home (meaning it has more than one unit), you may need to put down 15%.
• If you’re buying a second home, you’ll need to put at least 10% down.
• If you’re getting an adjustable-rate mortgage, the minimum down payment requirement is 5%.

A mortgage calculator can help you figure out how your down payment amount will affect your future monthly payments.

Private Mortgage Insurance

If you put down less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI). PMI protects mortgage investors in case of a loan default. The cost for PMI varies based on your loan type, your credit score and the size of your down payment.

PMI is usually paid as part of your monthly mortgage payment, but there are other ways to cover the cost as well. Some buyers pay it as an upfront fee included in their closing costs. Others pay it in the form of a slightly higher interest rate. Choosing how to pay for PMI is a matter of running the numbers to figure out which option is the cheapest for you.

The nice thing about PMI is that it won’t be part of your loan forever – that is, you won’t have to refinance to get rid of it. When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments.

If you reach 20% equity as a result of your home increasing in value, you can contact your lender for a new appraisal so they can use the new value to recalculate your PMI requirement. Once you reach 22% equity in the home, your lender will automatically remove PMI from your loan.

Other Requirements

A conventional lender will also have the following requirements.

Conventional Loan Minimum Credit Score 

In most cases, you’ll need a credit score of at least 620 to qualify for a conventional loan. When you apply, your lender will check your credit history to determine if you have qualifying credit. If you don’t, you might not ge