Conventional Loans: Your Ultimate Guide

Considering buying a new home or refinancing your existing one? If so, a great option is a Conventional Loan. They are considered “conforming loans” because they “conform” to the requirements set by Fannie Mae or Freddie Mac.

Understanding Conventional Loan Requirements

Conventional loans have their own rules. Generally, they are a bit pickier about credit scores compared to other mortgage programs, like FHA loans.

Down Payment

Down payment requirements depend on your specific transaction:

• First-Time homebuyer or earn less than 80% of the Area Median Income – minimum 3% down payment.
• Buying a Single Family Residence – minimum 5% down payment.
• Buying a multi unit property (2 unit, etc.) – minimum 15% down payment.
• Buying a second home – minimum 10% down payment.
• Doing a cash-out refinance – minimum 20% equity in the property.

Private Mortgage Insurance (PMI)

Putting less than 20% down? You will be required to pay for Private Mortgage Insurance (PMI). PMI provided protection to the mortgage lender should you default on your loan.

You can pay PMI as part of your monthly mortgage payment or you can opt to have the lender pay it for you (but your rate goes up). PMI won’t be around for long. Once you reach 20% equity in the home, you can ask the lender to ditch it. At 22% equity, it’s gone automatically.

Other Requirements

Credit Score: a 620 or higher credit score to qualify.

Debt to Income Ratio (DTI): Your DTI is your monthly debt, including your new house payment compared to your income. Conventional loans require your DTI at 50% or lower. The Automated Underwriting System (AUS) will determine what the acceptable DTI is on a case by case basis.

Loan Size: Your loan must fall under the limits set by Fannie Mae and Freddie Mac. Conforming loan limits change annually. The 2023 Conforming Loan Limit in Ohio is $726,200 for a single-family residence.

Why Choose a Conventional Loan?

Conventional loans have some great features, but how do they compare to other popular loan options?

Conventional Loans vs VA Loans

Conventional loans are available to anyone who qualifies, whereas VA loans are only available for active-duty servicemembers and veterans. And VA Loans don’t require a down payment or PMI.

Conventional Loans vs FHA Loans

Conventional loans require a higher minimum credit score. Some FHA lenders only require a 580 creidt score, some even lower. FHA’s minimum down payment is 3.5% compared to a Conventional loan’s minimum of 3%.

FHA loans may require that you pay MIP (Mortgage Insurance Premium), which is similar to PMI, for the life of the loan. PMI on a conventional loan automatically drops off when you reach 22% equity.

Conventional Loans vs USDA Loans

You can get a conventional loan anywhere. But USDA loans are only for properties in qualifying rural areas. USDA loans require borrowers to pay a Guarantee Fee, which is similar to PMI.

Finding the Right Interest Rate for Conventional Mortgages

Interest rates for conventional loans change daily and are extremely credit score driven. Reach out to me at T.C. Strait | Mortgage Loan Officer to get your personalized mortgage rate quote to ensure that you have the most up-to-date information.

Conclusion

Conventional loans can be a fantastic option for your new home or refinance. Contact a mortgage broker, like Lynx Financial Group, LLC, to help you find the best mortgage option to meet your housing goals!