Conventional loans — mortgages that are not insured by the federal government — are the most popular type of mortgage and offer affordability to homebuyers.
Private mortgage lenders originate and fund conventional loans, which are then often bought by Fannie Mae and Freddie Mac, publicly traded companies that are run under a congressional charter.
By buying and selling conventional conforming mortgages, Fannie and Freddie help to ensure a reliable flow of mortgage funding.
Requirements for Conventional Loans
It can be confusing to know how to qualify for a mortgage.
Just realize, for one thing, that a higher credit score is usually required for a conventional loan than an FHA loan, popular among first-time buyers.
Here are factors a lender will consider when sizing you up for a conventional loan.
Your Credit Score
You’ll usually need a FICO® credit score of at least 620 for a fixed-rate or adjustable-rate mortgage.
The FICO score range of 300 to 850 is carved into these categories:
• Exceptional: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579
In general, the higher your credit score, the better the interest rates you’re offered.
Putting 20% down is desirable because it means you can avoid paying PMI, or private mortgage insurance, which covers the lender in case of loan default.
But many buyers don’t put 20% down. The median down payment on a home is 13%, according to a recent study by the National Association of Realtors®.
Conventional loans require as little as 3% down, and the down payment can be funded by a gift from a close relative; a spouse, fiancé or domestic partner; a buyer’s employer or church; or a nonprofit or public agency. The gift may require a gift letter for the mortgage.
Just keep in mind that the smaller the down payment, the higher your monthly payments are likely to be, and PMI may come along for the ride until you reach 20% equity.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Your debt-to-income ratio (DTI) helps a lender understand your ongoing monthly debt obligations relative to your gross monthly income.
To calculate back-end DTI:
1. Add up your monthly bills (but do not include groceries, utilities, cellphone bill, car insurance, and health insurance).
2. Divide the total by your pretax monthly income.
3. Multiply by 100 to convert the number to a percentage.
In general, lenders like to see a DTI ratio of 36% but will accept 43%.
The Fannie Mae HomeReady® loan, for lower-income borrowers, may allow a DTI ratio of up to 50%.
In any case, the lower your DTI ratio, the more likely you are to qualify for a mortgage and possibly better terms.
The loan-to-value ratio (LTV) is the amount of the mortgage you are applying for compared with the home value. The higher the down payment, the lower the LTV ratio.
Fannie Mae typically sets LTV limits at 97% for a fixed-rate mortgage for a principal residence (think: 3% down) and 85% for a fixed or adjustable loan for a one-unit investment property.
When LTV exceeds 80% on a conforming loan, PMI will likely apply, although some borrowers employ a piggyback loan to avoid mortgage insurance.
Conventional Conforming Loan Limits
Many loans are both conventional and conforming — meaning they meet the guidelines of secondary mortgage market powerhouses Fannie Mae and Freddie Mac, which buy such mortgages and often package them into securities for investors.
Conventional conforming loans fall below limits set by the Federal Housing Finance Agency (FHFA) every year.
Staying under a conforming loan limit often equates to a lower-cost mortgage because the loan can be acquired by Fannie and Freddie.
The conforming loan limits for 2022 in many counties in the contiguous states, Washington, D.C., and Puerto Rico rose with market prices:
• One unit: $647,200
• Two units: $828,700
• Three units: $1,001,650
• Four units: $1,244,850
In high-cost areas like Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the 2022 conforming loan limits were:
• One unit: $970,800
• Two units: $1,243,050
• Three units: $1,502,475
• Four units: $1,867,275
Word games, anyone? Nonconforming loans are simply mortgages that do not meet Fannie and Freddie standards for purchase. They usually take the form of jumbo loans and government-backed loans.
A homebuyer or refinancer who needs a mortgage beyond the FHFA limits can seek a jumbo mortgage loan. A jumbo loan is still a conventional loan if it’s not backed by a government agency; it’s just considered a “nonconforming” loan.
FHA, VA, and USDA mortgages — those backed by the Federal Housing Administration, Department of Veterans Affairs, and the U.S. Department of Agriculture — are also nonconforming loans.
Nonconforming mortgage rates may be higher because the loans carry greater risk for lenders, but at times the rates might skew lower than conventional conforming rates.
Conventional loan requirements are good to know when you’re looking at the most popular type of mortgage around. Then again, a jumbo loan may sound pretty good.
SoFi offers both, each with special features. Check out the advantages of SoFi mortgage loans. And then, within minutes…
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