A Conventional Loan typically refers to a loan that meets Fannie Mae and Freddie Mac standards. Fannie Mae is a nickname for the Federal National Mortgage Association (FNMA) and Freddie Mac is a nickname for the Federal Home Loan Mortgage Corporation (FHLMC). The two agencies are a creation of the federal government developed to purchase mortgage loans from lenders.
Depending on the percentage of the home purchase being financed, also known as Loan-to-Value (LTV), a conventional loan borrower may or may not be required to obtain Private Mortgage Insurance (PMI). Conventional Loans with a loan-to-value over 80% l require mortgage insurance to protect the lender's investment if a borrower is not able to repay the loan.
Benefits of a Conventional Loan
A Conventional Loan has a lot to offer first-time homebuyers. Here are just some of the benefits of a Conventional Loan:
- Low down payments as low 3.0% of the purchase price
- Available in all 50 states and from nearly all lenders
- Flexible ways to pay or finance the private mortgage insurance
- Lower mortgage insurance premiums for high credit score borrowers
- Seller is permitted to pay homebuyer's closing costs
- No income limits to meet
- May be easier to cancel mortgage insurance if you have enough equity
- Automated underwriting makes loan review quick and easy
Eligibility for a Conventional Loan
Conventional Loans are typically a bit harder to qualify for than an FHA, VA, or USDA loan, but the benefits of a Conventioal loan can be worth it. Conventional loans are more likely to require higher credit scores, more cash to be invested or saved and lower overall monthly payments. While it is possible to still qualify for a Conventional loan with a lower credit score, your mortgage insurance premiums will be higher and your interest rate may be higher as well. Your lender will want to see that your housing and other debt payments are not more than around 41% of your gross monthly income (before taxes).
Conventional and State Bond
It is possible to get a Conventional loan that is combined with your local Housing Finance Agency's lower rate. Depending on the interest rate of your state's first-time homebuyer loan program, this could be a very good option to explore. Of course, you can also get a market-rate Conventional loan. Do shop around though as Conventional loan rates, like most loan rates, differ and the maximum rate lenders charge does too. By choosing to work with a lender who specializes in offering your local state bond program you are more likely to get a great rate if you qualify.
In general, the fees on a Conventional loan will be very competetive if you shop around. A Conventional loan with a loan-to-value (LTV) of over 80% will require private mortgage insurance (PMI). One nice feature of getting a Conventional loan is that you will have a variety of options to either select a monthly premium plan or select a so called "No MI" rate where the cost of the mortgage insurance is built into the rate. Most Conventional loan programs also offer an up-front mortgage insurance premium as well. Of course, if you have enough savings or can borrower funds from a government loan program to make a 20% down payment, you will be able to avoid the cost of mortgage insurance entirely. Ask your lender to tell you more about their Conventional loan options to see if it is a good fit for you.