How to Qualify for a Conventional, Fannie Mae or Freddie Mac Loan

Conventional Loan Requirements

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A conventional mortgage is a mortgage that's not backed by a government entity like the Federal Housing Administration. Conforming conventional mortgages adhere to underwriting guidelines set by mortgage financing giants Fannie Mae and Freddie Mac.

Conventional loans often may offer lower interest rates than their government-insured counterparts. To qualify for one of these loans, you typically need to have good credit, a steady income, and the funds to cover a down payment. They can also be easier and faster to close than their government-backed counterparts.

Learn more about conventional mortgages and their requirements.

What Is a Conventional Mortgage?

Conventional loans include both conforming and non-conforming loans. A conforming loan is a loan that meets the guidelines of Freddie Mac and Fannie Mae. These companies are government-sponsored enterprises, which means they are private companies that were started by the government. They back mortgages to make them less risky to lenders.

Freddie Mac and Fannie Mae have guidelines for their mortgages. One of these is that the loans have limits. In most areas of the U.S., the conforming loan limit is $548,250 for 2021. Some areas have a higher cost of living, and the limit is higher in those areas. The maximum loan limit for a high-cost area is $822,375 for 2021.

Conforming mortgages can have a fixed or adjustable interest rate. A fixed interest rate means that your interest rate stays the same for the length of your mortgage. An adjustable-rate mortgage means that the interest rate can fluctuate periodically.

Conforming Conventional Loan Requirements

Fannie Mae and Freddie Mac require that all borrowers meet certain credit scores, income requirements, work history, debt to income ratios, and minimum down payments.

A few of the items that a lender will look at when considering financing include:

  • Your total monthly expenses
  • Your total gross income per month
  • Your employment history
  • Your credit score and payment history
  • Your assets, including checking, savings, and retirement accounts

Your mortgage professional might require additional information after personally reviewing your application, but some basic requirements for conforming loans include:

  • A minimum credit score of 620
  • Total debt-to-income ratio of 45% or less
  • A down payment of 3% or more
  • Down payment funds should come from an allowed, documented asset source
  • Some Fannie Mae and Freddie Mac loans have income limits
  • You may need to have a certain amount of cash reserves depending on your credit score and debt-to-income ratio

You may need to take a homebuyer education class to qualify for a Fannie Mae or Freddie Mac mortgage.

Private Mortgage Insurance

Fannie Mae and Freddie Mac mortgages may also require you to purchase private mortgage insurance (PMI). This insurance protects the lender if you stop paying your mortgage and your home goes into foreclosure. It's a monthly fee that's included in your mortgage payment, and it's typically required if you make a down payment of less than 20%.

You can cancel your mortgage insurance once you reach 20% equity in your home. Your lender must cancel your PMI when you reach 22% equity in your home or when you reach the midpoint of your loan's payment schedule, whichever comes first.

FHA vs. Conforming Conventional Mortgages

FHA loans require that a property meet strict eligibility guidelines as far as price, location, and habitability, but conventional lenders aren't bound by these same bureaucratic regulations.

FHA loans also have less stringent credit score requirements than conforming mortgages. You might qualify with a score as low as 500 to 580 depending on some additional factors, and you most likely won't be hit with additional fees or higher rates because your credit score is less than average.

Conventional loans can be used to finance just about any type of property, whereas some condo complexes and certain houses aren't approved for FHA financing.

Either mortgage option could work for many borrowers. To find out which is the best fit, contact lenders and discuss both options. They can help you determine which option is best for your financial situation and homeownership needs.