A conventional mortgage is one 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 may offer lower interest rates than those insured by the government. To qualify for one of these loans, you need to have good credit, a steady income, and the funds to cover a down payment. They can also be faster to close than their government-backed counterparts.
Learn more about conventional mortgages and their requirements.
- A conventional mortgage is a home loan that’s not part of a government program.
- Some conventional mortgages are conforming. This means they meet the standards set by Freddie Mac and Fannie Mae.
- Some conventional mortgages require private mortgage insurance (PMI) if you make a down payment of less than 20%.
What Is a Conventional Mortgage?
Conventional loans include both conforming and non-conforming loans. A conforming loan meets the guidelines of Freddie Mac and Fannie Mae. These are government-sponsored enterprises—private companies that were started by the government. They back mortgages to reduce the risk 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 United States, the conforming loan limit is $548,250 for 2021. In areas with a higher cost of living, the limit is higher. The maximum loan size 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 rate stays the same for the length of your mortgage. An adjustable-rate mortgage means that the rate can go up or down.
Conforming Conventional Loan Requirements
Fannie Mae and Freddie Mac require that all borrowers meet certain credit scores, income levels, work history, debt to income ratios, and minimum down payments.
A few of the items 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 lender might ask for more information after personally reviewing your application. 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 coming from a documented asset source
- Some Fannie Mae and Freddie Mac loans have income limits
- 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). PMI protects the lender if you stop paying your mortgage and your home goes into foreclosure. It's a monthly fee added to your mortgage payment. PMI is often required if you make a down payment of less than 20% of the purchase price.
You can cancel your PMI 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 guidelines as far as price, location, and condition to live in. Conventional lenders aren't bound by these same rules.
FHA loans also have less stringent credit score requirements than conforming mortgages. You might qualify with a score as low as 500 to 580. You most likely won't be hit with extra fees or higher rates if your credit score is less than average.
Conventional loans can be used to finance just about any type of property. 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. Lenders can help you determine which option is best for your financial situation and homeownership needs.