If you’re in the market for a mortgage, you may have noticed that all home loans are not created equal. There are actually many different kinds of mortgages, including jumbo loans, interest-only mortgages, government-backed loans, and more. Figuring out the difference between them, and which mortgage is right for you, can get confusing.
One of the most common terms you’re likely to hear in the mortgage world is “conventional loan.” What exactly does that mean? Basically, a conventional loan is a mortgage that is not guaranteed or insured by the government.
Federal agencies such as the Federal Housing Administration, Department of Veterans Affairs, and the Department of Agriculture all offer programs to back mortgages.
Any loan that doesn’t receive this backing is considered conventional. Conventional loans are by far the most popular type of mortgage, representing more than 70% of new home sales in the first quarter of 2019.
Fannie Mae and Freddie Mac are companies created by Congress in 1938 and 1970, respectively. These entities don’t provide mortgages directly; rather, they buy mortgages from lenders, often packaging them into securities. By purchasing mortgages and guaranteeing they’ll be paid on time, these entities help make mortgages more available and affordable to borrowers.
Today, both Fannie Mae and Freddie Mac are publicly traded companies that are run under a congressional charter. Because they are not government agencies themselves, the mortgages they buy are considered “government-sponsored ,” not government-insured. Therefore, they are still considered conventional. In fact, these two entities help finance most conventional mortgages in the U.S. today.
What’s the Difference Between Conventional and Conforming Loans?
“Conventional” and “conforming” can sound similar in everyday conversation — both refer to something or someone that sticks to the customary rules. But in the context of mortgages, they mean different things.
A conventional loan can either be conforming or non-conforming. A conforming loan is one that meets the requirements established by Fannie Mae and Freddie Mac in order to be purchased by these companies. The main requirement is that the loan fall below a certain loan limit — the maximum value of the mortgage. The Federal Housing Finance Agency revises these limits every year, and more expensive areas or high-cost areas, get a higher bar.
In 2020, the limit for conforming loans for one-unit properties is $510,400 in most of the country. Most high-cost areas, such as San Francisco and Manhattan , have a limit of $765,600 in 2020. Loans that don’t meet these requirements, and thus aren’t eligible to be guaranteed by Fannie Mae and Freddie Mac, are considered non-conforming. They can vary widely in terms and requirements to qualify, and they may carry higher interest rates.
Many loans are both conventional (not insured by the government directly) and conforming (meet the guidelines set by Fannie Mae and Freddie Mac). When a loan falls under both of these definitions, it’s known as a “conventional conforming loan.”
And now you know this has nothing to do with lacking a rebellious nature! Conventional conforming loans usually offer lower interest rates compared to jumbo loans (which exceed the conforming loan limits). However, lately jumbo mortgage rates have been similar and sometimes lower than conventional conforming loans.
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Common Conventional Home Loan Requirements
So what does it take to qualify for a conventional mortgage? The lender is likely to consider the following factors:
Your Credit Score
A credit score is used by many lenders to help them predict how likely you are to repay the loan based on how you have managed credit in the past. Many factors go into this score, such as how many and what type of accounts you have.
Their average age, how much of your available credit line you’re using, and payment history. For a conventional loan, you usually need a credit score of at least least 620 . For an FHA (government-backed) loan, by contrast, borrowers can possibly qualify with an even lower credit score .
The Down Payment
A down payment is a share of the total cost of the home that you pay upfront. Putting 20% down is desirable since it often means you can avoid paying private mortgage insurance (PMI) which is an insurance that covers the lender in case of loan default.
However, you don’t need to put 20% down. Although required down payment amounts can vary depending upon the loan program and other factors, for most loan programs the required down payment amount is much lower.
Most lenders offer conventional mortgages with minimum down payments as low as 5% and for First Time Homebuyers (FTHB) down payments can be as low as 3% . Just keep in mind that the smaller the down payment, the higher your monthly payments are likely to be, and you may also be responsible for PMI.
The debt-to-income ratio is a figure that helps a lender understand your ongoing monthly debt obligations, relative to how much income you bring in.
Specifically, it’s calculated by adding up all the debt you pay each month, along with your total proposed new monthly housing payment (principal, interest, taxes, insurance, HOA dues if applicable) and dividing that by your gross monthly income (what you earn before taxes or deductions). Your debts may include things like ongoing existing mortgage payments, student loans, credit card payments, car loans, etc.
Eligible Income can include not only wages, but also sources like public assistance, Social Security, pensions, alimony, and child support.
You generally need to meet the DTI requirements for the loan program you choose in order to qualify for a conventional or government-guaranteed loan, and the lower your DTI , the more likely you are to qualify for a mortgage and possibly better terms.
The loan-to-value ratio refers to the amount of the mortgage you are applying for relative to the appraised value of the home. The more money you put down, the lower your loan-to-value ratio will be (because the amount you need to borrow is reduced).
Fannie Mae typically sets LTV limits from 97% for a FTHB purchase to 65% for cashout on a manufactured home. This is a moving number depending on the type of transaction and other factors.
A lower LTV due to higher down payment sometimes means you can qualify with a lower credit score, and vice versa. When the LTV exceeds 80.00% on a conforming loan, private mortgage insurance will likely apply.
Why Apply for a SoFi Mortgage
With SoFi, you can easily apply for a mortgage up to $3 million online. For a conforming loan, you may be eligible for a down payment as low as 10% and a DTI of up to 50%. (Remember that to be conforming, the mortgage amount must meet the loan limits set by the federal government for your area.)
You can choose from a variety of terms, depending on whether you want to pay off your loan faster or maintain a more affordable monthly payment.
SoFi home loans offer competitive rates, a dedicated mortgage loan officer to help you throughout the loan process and helpful member benefits. It takes just two minutes to see if you qualify online.
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