Conventional Mortgage

Find out if a conventional loan is right for you

What is a Conventional Mortgage?

A conventional mortgage is a home loan that is not backed by a government agency. A “conventional mortgage” or “conventional loan” simply refers to any mortgage loan that is not insured or guaranteed by Federal Government agencies such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).

A conventional home loan often meets the down payment and income requirements set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Conventional loans will also often conform to the loan limits set by the FHFA (Federal Housing Finance Administration).

Conventional mortgage borrowers who put at least 20% down don’t have to pay for mortgage insurance, which is typically required with lower down payments or government-backed loans. Mortgage companies like On Q Financial, Inc. are required to make borrowers purchase mortgage insurance which protects the lender if the buyer defaults on the mortgage. However, for borrowers, this type of insurance has benefits as well. Getting mortgage insurance allows borrowers to purchase a home before they have a full 20 percent down payment saved. This can open up more opportunities for home buyers.

What is the difference in conforming and nonconforming loans?

Conventional mortgages can either be conforming or nonconforming.

Conforming loans follow Fannie Mae and Freddie Mac guidelines. Nonconforming loans, often called jumbo loans, do not follow Fannie Mae and Freddie Mac guidelines.

The guideline that affects most home buyers is the loan limit. In 2020, the conforming loan limit for single-family homes in most of the continental U.S. is $510,400. Higher-cost areas, such as Hawaii and Alaska, have higher limits up to $765,600 for single-family homes.

Borrowers are not eligible for conforming loans when the loan amount is higher than the conforming loan limit for the area. These borrowers would then want to apply for a nonconforming loan or Jumbo loan.

What are Conforming Loan Limits?

Conventional Conforming loans are ideal for home buyers with average to excellent credit who can afford a down payment of at least* 3%-5% on a one-unit primary residence. Down payments on second homes are offered at a 90% LTV and on a single unit investment property the LTV is offered at an 85%. This can vary depending on how many financed properties the borrower has or if the property is a two, three, or four unit property. **

At the beginning of each year, FHFA updates the Conventional loan limits. The standard loan limits increased up to $484,350 from $453,100 in 2019. Conventional loan limits may fluctuate based on your city, region, or state. Click here to see if limits could be different in your area.

2020 Loan Limits

wdt_ID Purchase Price Down Payment Max Loan
1 $499,300 3% $484,350
2 $605,400 20% $484,350

2019 Loan Limits

wdt_ID Purchase Price Down Payment Max Loan
1 $467,100 3% $453,100
2 $556,375 20% $465,100

How much of a down payment does a Conventional loan require?

Unlike the requirements of other loan types, conventional loans are unique because they allow borrowers to make a down payment of as little as 3%. Flexibility like this is what makes conventional loans so attractive to borrowers. Of course, borrowers can choose to make any amount of a down payment they choose that is greater than 3%. If a borrower makes a down payment of 20% or more, they will be exempt of having to purchase PMI, which can save a lot of money in the end.

Can a First Time Home Buyer get a Conventional Loan?

First-time home buyers may not know it but they have more loan options available to them than just a traditional FHA loan. Conventional loans are often perfect for first time home buyers. The flexibility of down payments opens the door to individuals and families with varying incomes and savings amounts. Conventional loans require only a 3% down payment to qualify as long as one buyer is a first time home buyer or if they meet area income guidelines. However, conventional loans might provide the most cost saving to borrowers who are able to make a 20% down payment or more as there is no additional fee for mortgage insurance.

What are the benefits of a Conventional Loan?

A conventional loan is a great option for borrowers with good credit and a low debt-to-income (DTI) ratio who can make a down payment of 20% or more, as this allows them to avoid paying for private mortgage insurance (PMI). Borrowers looking for a lower down payment can also make down payments as low as 3%- they’ll just need to pay for PMI until the loan amortizes down to a 78% LTV or at an 80% LTV they can contact their servicer to see if they can have the Mortgage insurance removed based on the equity in their home. With conventional loans, borrowers also have options for lender-paid mortgage insurance (LPMI) which is offered at a higher interest rate but this removes a monthly mortgage insurance fee from the borrowers total mortgage payment.

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No private mortgage insurance is required with a 20% down payment

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Multiple mortgage insurance options for LTV’s greater than 80%

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All funds can come from a gift on a primary residence conforming loan amount

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Financing available for single family homes and other property types up to 4-unit properties
2nd homes

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Residential investment properties up to 10 financed properties

Why are Conventional Loans important for Realtors?

Conventional loans should prove to be a very hot topic for real estate agents because it opens up the door for so many of their clients. First time home buyers will rejoice at the flexible down payment options.  Conventional loans can also account for the range in home prices that borrowers will be interested in purchasing because these loans can be either conforming or nonconforming.  If a loan amount needed exceeds the loan limit for an area, a borrower can apply for a nonconforming conventional loan for the true amount they need to borrow. The flexibility in choices and options that innately comes with conventional loans is something every realtor should be speaking about with their clients.

How does a Conventional loan compare to other loan types?

Conventional loans are different in many ways. Credit score requirements are higher for conventional loans. Down payment amounts vary for conventional loans as well. Take a look at the chart below for major differences in an FHA loan and Conventional loan. Arms are also allowed on FHA and VA. Most buyers prefer fixed rates. Check with us on our pricing.

Conventional Home Loans vs FHA Home Loan vs USDA Home Loan vs VA Home Loan

wdt_ID   Conventional FHA USDA VA
1 Minimum Credit Score 620 580 620 600 with AUS approval
2 Down Payment *From 3% to 20% or more 3.5% 0% 0%
3 Loan Terms 10, 15, 20, or 30 years 15 or 30 years 30 years 15 or 30 years
4 Mortgage Insurance Required with less than 25% down Required Required Required
5 Who Can Qualify? Available to all* Available to all Approved Rural Areas only and must meet household income guidelines Veterans Only

See if a conventional loan is right for you

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*3% down if at least one buyer is a first time homebuyer or can meet area income guidelines. **Conventional loans can have a fixed rate mortgage or an adjustable rate mortgage. On Q Financial, Inc. offers 10, 15, 20, 25 and 30-year mortgage rates.

The following loan scenario is only an example. Actual amounts, fees, and rates vary depending on each individual borrower’s situation and additional factors. Loan example is based on a loan amount of $250,000, 30-year fixed conventional mortgage loan with a 3% down payment of $7,500 and estimated closing costs of $4,850. Interest rate of 4.00%, APR of 5.155% and an estimated monthly payment of $1,672.63. All amounts shown are estimates provided for educational and comparison purposes only and will vary for each loan. Rates and fees are subject to change at any time. This is not a commitment to lend or extend credit. Loan approval is subject to applicant’s qualifications for a loan program. Please contact your On Q Financial, Inc. Mortgage Consultant for more information. On Q Financial, Inc. is an Equal Housing Lender. NMLS 5645

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