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Conventional Loans
What is an Conventional Loans?
A conventional loan is a mortgage that is not insured or guaranteed by a government agency. However, many conventional loans are conforming loans, meaning they meet the guidelines set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) that purchase and securitize these loans.
This type of loan may be a good fit if you have strong credit, stable income, and the ability to make a down payment. While a larger down payment can help eliminate private mortgage insurance (PMI), it is not always required—some programs allow as little as 3% down.
Conventional loans are offered by private lenders, including banks, credit unions, and mortgage companies, rather than government agencies.
These loans can come with either fixed or adjustable interest rates. A fixed-rate conventional loan offers stability, as the interest rate remains the same throughout the life of the loan, while adjustable-rate mortgages (ARMs) may have lower initial rates that change over time.
Interest rates for conventional loans are typically: Lower than FHA loans (for borrowers with strong credit) Higher than VA loans, which are backed by the government and offer more favorable terms to eligible veterans Conforming conventional loans must stay within the loan limits established by Fannie Mae and Freddie Mac. Loans that exceed these limits are considered jumbo (non-conforming) loans. In many cases, borrowers may be able to qualify for higher loan amounts with a conventional loan compared to an FHA loan, depending on their financial profile. To apply, borrowers must complete a mortgage application and provide documentation for income, assets, employment, and credit history, allowing the lender to fully assess eligibility.
Conventional Mortgage Topics Covered
A conventional Loans is one that’s not guaranteed or insured by the federal government. Instead, they are available through private lenders, such as banks, credit unions, and mortgage companies.
Conventional mortgages have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. This gives Texas homebuyers a sense of stability that is not present in the case of, say, an adjustable-rate mortgage. Interest rates for conventional loans tend to be lower than rates for FHA loans yet higher than those of VA loans.
Conforming conventional loans must fall within the limits set by Fannie Mae and Freddie Mac. If the loan surpasses that limit, it becomes a jumbo (nonconforming) loan.
Usually, you’ll be able to borrow more money on a conventional loan than on a FHA loan.
Potential Texas borrowers must complete an official mortgage application (and usually pay an application fee), then supply their lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.
Documentation Needed to Get a Conventional Loans
- Proof of income and assets.
- Employment verification.
- A driver’s license/state ID card.
- A valid social security number.
Other Requirements
- Have a FICO credit score of at least 620 (this number may vary from lender to lender).
- Make a down payment.
- Have a debt-to-income (DTI) ratio of less than 50%. This means that your total monthly debt payments can’t be more than 50% of your pretax income (includes debts that you aren’t actively paying).
- In the case of a conforming conventional loan, your loan must fall within the limits set by Fannie Mae and Freddie Mac.
Down Payment
The requirement for a down payment can vary based on your personal circumstances and the kind of loan or property you’re getting. First-time home buyers in Texas have the possibility of acquiring a conventional mortgage with a down payment as low as 3% through financial assistance programs.
- If you’re not a first-time home buyer, the down payment requirement is 5%.
- If you’re a second-time home buyer, the requirement is 10%.
- With an adjustable rate mortgage, you need to put down at least 5%.
- In the case of a jumbo loan, the down payment requirement ranges from 10% to 40%.
- If you’re not buying a single-family home, you may need to put down 15%.
If you choose to make a down payment of less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI), which protects your lender in case you default on your loan. This is different from FHA loans, where you have to pay an upfront mortgage insurance premium (UFMIP) and an annual MIP.
Your PMI is typically included as part of your monthly mortgage payment, but there are other ways to cover the cost as well. There’s the option to pay it as an upfront fee, or, alternatively, in the form of a slightly higher interest rate.
When you reach 20% equity on your home, you can ask your lender to remove the PMI from your mortgage payments. Once you reach 22% equity, though, the PMI will automatically be removed.
- Conforming – meets loan standards set by Fannie Mae/Freddie Mac. For clarification: the FNMA (Fannie Mae) and the FHLMC (Freddie Mac) are home mortgage companies created by the U.S. Congress. They make the mortgage market more affordable and stable, and they provide liquidity to thousands of loans, banks, and mortgage companies in America.
- Nonconforming – (like a jumbo loan, for example) doesn’t meet the loan standards set by Fannie Mae/Freddie Mac. Oftentimes, jumbo loans require a higher credit score than conforming ones do.
- Fixed Rate – for as long as you have the mortgage, the interest rate will remain the same.
- Adjustable Rate – (also referred to as hybrid ARMs) rates change annually, after staying fixed for a set amount of years.
- Amortized – there is a set monthly payment from the beginning to the end of your loan repayment period, without a balloon payment (these can have either fixed or adjustable rates).
- Low Down Payment – more flexible than other types; you can get a down payment as low as 3 or 5 percent.
- Portfolio – the lender chooses to keep the loan in its own portfolio as opposed to selling it on the secondary market. These are good if you have a high DTI or a low credit score but are still able to afford something with a higher interest rate.
- Renovation – allows you to finance a house while also paying for renovations (good if you’re buying a fixer-upper).
- The interest rates tend to be lower.
- There are more options in terms of down payment.
- Overall, these loans can be very flexible as most of them don’t need to follow the guidelines set by government agencies.