Conventional Loans

Conventional loans are mortgages that aren't insured or guaranteed by a federal government agency. They're the most common type of home loan and conform to guidelines set by Fannie Mae and Freddie Mac.

These loans offer flexibility in loan amounts, terms, and property types. With strong credit and stable income, conventional loans often provide the best rates and lowest overall costs.

Conventional loans can be used for primary residences, second homes, and investment properties, making them versatile for various homebuying situations.

Conforming Loans: These meet Fannie Mae and Freddie Mac guidelines and loan limits ($766,550 for most areas in 2024). They offer the best rates and terms.

Non-Conforming Loans: These exceed conforming loan limits or don't meet standard guidelines. Jumbo loans are the most common type of non-conforming loan.

Fixed-Rate Mortgages: Interest rate stays the same for the entire loan term, typically 15 or 30 years. Most popular option for long-term homeowners.

Adjustable-Rate Mortgages (ARMs): Initial fixed rate period (typically 5, 7, or 10 years) followed by rate adjustments. Can offer lower initial rates.

Portfolio Loans: Kept by the lender rather than sold to Fannie or Freddie. May have more flexible guidelines but typically higher rates.

Credit Score: Minimum 620, but 740+ gets the best rates. Higher scores mean lower interest rates and fees.

Down Payment: As low as 3% for first-time buyers, 5% for repeat buyers. 20% down avoids PMI.

Debt-to-Income: Typically 45% max, though some lenders go up to 50% with strong compensating factors.

Employment: Two years of stable employment history. Job changes in the same field are usually acceptable.

Cash Reserves: Some lenders require 2-6 months of reserves, especially for investment properties or multiple mortgages.

Appraisal: Property must appraise for at least the purchase price. Property condition requirements are less strict than FHA.

Conventional loans require PMI when you put down less than 20%. PMI typically costs 0.3% to 1.5% of the original loan amount annually, paid monthly.

The good news: PMI automatically terminates when you reach 22% equity, and you can request removal at 20% equity. This is a major advantage over FHA loans.

PMI cost depends on your credit score, down payment, and loan type. Higher credit scores and larger down payments result in lower PMI costs.

Some lenders offer lender-paid PMI, where they pay your PMI in exchange for a slightly higher interest rate. This can be beneficial if you itemize deductions.

Avoiding PMI: Put down 20% or more, use a piggyback loan (80-10-10), or consider an FHA loan and refinance later if it makes financial sense.

Strong Credit: If you have a 740+ credit score, conventional loans offer the best rates.

Larger Down Payment: With 10-20% down, conventional loans become very competitive and may beat government loans.

Higher Loan Amounts: Conventional conforming loans allow up to $766,550 (higher in expensive areas), more than FHA limits.

Investment Properties: Conventional loans are the standard for investment property financing.

Second Homes: Conventional loans offer great rates for vacation homes and second properties.

Avoiding Lifetime MI: Unlike FHA, conventional PMI can be removed, saving thousands over the life of the loan.