If you have a good credit score and at least a 3% down payment, this loan is for you! If you’ve saved enough for a 20% down payment, you can also lower your monthly payments by eliminating mortgage insurance (PMI).
• At least a 620 credit score
• Debt-to-income ratio of 50% or less
• At least 3% down payment
What is a conventional loan?
Conventional loans are just about the most basic type of loan offered. The qualifications are very simple, and because it requires a lower debt ratio and higher credit score, the rates for these loans are often low.
Unlike other loan types, conventional loans are not insured or guaranteed by the federal government. For conforming loans, qualifications are put in place by Fannie Mae or Freddie Mac, which are government-sponsored institutions.
Conforming vs. Non-conforming
Conventional mortgages are typically conforming, since most loans meet the requirements put in place by Fannie Mae or Freddie Mac. However, there are some loans that do not meet these guidelines, and are considered non-conforming conventional loans. The most common non-conforming loan is a Jumbo Loan.
What is PMI?
PMI stands for “private mortgage insurance,” which is a way to protect your lender in case you default on your loan. The amount depends on many factors, including your credit score, down payment amount, and loan type. If you put down less than 20% as a down payment at closing, you will be required to pay some type of PMI.
Often, this amount is party of your monthly payment, but there are options to cover it in other ways. Some choose to pay a higher rate or a lump sum upfront. Either way, once you reach 20% equity, PMI can be removed from your payments. This is why a 20% down payment eliminates the need to pay any PMI.
Conforming conventional loans are required to fall within limits set by Fannie Mae or Freddie Mac. These amounts change annually and vary based on your location. To see what the current limit is where you live, visit the Federal Housing Finance Agency website here.
Don’t worry – if the house you are looking to buy is above this loan limit, there are still options for you! You can get a Jumbo Loan to cover the amount you need. This is still a conventional loan, but it is non-conforming and requires a higher down payment.