When it comes to funding the purchase of new homes, there’s no question that conventional loans are a popular pick. According to the National Association of Home Builders, conventional loans accounted for almost 74 percent of new home sales in 2018’s first quarter. Could this form of financing be the right choice for your planned home purchase? To decide if it’s a good fit for your circumstances, explore the guidelines for conventional loans below.
The Guidelines for Conventional Loans
What is a conventional loan? Conventional loans are home loans that are guaranteed by a government-sponsored enterprise (GSE) like the Federal Housing Administration, the U.S. Department of Agriculture, or the U.S. Department of Veterans Affairs (source). As a result, they are sometimes referred to as GSE loans.
Advantages of a Conventional Loan
Why do so many borrowers opt for conventional loans? They offer many advantages (source):
- Flexibility: While FHA, VA, and USDA loans generally have specific requirements about the type of property they can be used for, conventional loans are far more flexible. Conventional loans can be used to purchase anything from a primary residence or vacation home to a rental property.
- Variety: Conventional loans come in all shapes and sizes. You’ll find a wide range of terms and fixed-rate and adjustable-rate options.
- Availability: The vast majority of lenders offer conventional loans, which makes it easy to find a lender with whom you feel comfortable working.
- Competitiveness: Conventional loans come with competitive terms that can make them a great deal for qualifying borrowers.
Conventional, Conforming, and Nonconforming
Conventional loans can be either conforming or nonconforming. What is the difference? In the mortgage industry, there is a secondary market where home loans are routinely repackaged and sold. This market helps make mortgages possible by providing lenders with funds to make new loans. The Federal Home Loan Mortgage Corporation, which is more widely known as Freddie Mac, and the Federal National Mortgage Association, which is often referred to as Fannie Mae, are two of the biggest buyers in this secondary market. These organizations set guidelines for factors like loan size, documentation required, loan-to-value ratio, debt-to-income ratio, and credit score that determine which loans they will purchase. A loan that fits these guidelines is called a conforming loan. Lenders generally prefer to make conforming loans because they know that a market exists for them.
While it’s not uncommon to hear people use conventional loan and conforming loan interchangeably, the two terms are not synonymous. While the majority of conventional loans are conforming, some conventional loans are nonconforming loans. Nonconforming loans include niche products and jumbo loans, which are for amounts that exceed the conforming loan limit set by the Federal Housing Finance Agency.
Securing a Conventional Loan
What are the guidelines for conventional loans? Because of their marketability, conventional loans that double as conforming loans are generally easier to secure. As Loans 101 reports, applicants seeking one of these loans typically need to meet requirements in the following areas:
- Down Payment: Although a down payment of 20 percent is generally required to dodge demands for private mortgage insurance, the down payment required to secure a conventional conforming loan can be as low as 3 percent for qualified applicants.
- Credit Scores: A FICO credit score of at least 620 is generally necessary. A score of 720 or more is needed to secure the best interest rates and highest loan-to-value limits.
- Loan-to-Value Ratios: A loan-to-value ratio expresses how the total amount borrowed compares to the property’s appraised value. What is acceptable hinges on factors like the borrower’s credit, the loan program, and the property. Minimum loan-to-value requirements can range from 80 percent to 97 percent.
- Debt-to-Income Ratios: Lenders prefer to see a front-end debt-to-income ratio (which compares your new monthly housing costs to your income) of no more than 28 percent. The back-end debt-to-income ratio (which compares your new monthly debt total with your income) is also a concern. This should be no more than 36 percent.
- Loan Amounts: Across most of the U.S., the maximum conventional conforming loan amount for a single-family home is $453,100. This figure is based on home values. In areas where housing is more expensive, it can be higher.
Are you searching for the mortgage that’s right for your needs? You can count on PrimeLending of Springfield, Missouri. We offer a wide range of loan products. Now that you know the guidelines for conventional loans, you may wish to explore our competitive conventional loan options. Contact us today to speak with one of our expert loan professionals and explore the possibilities.