Conventional Loans


Conventional loans are underwritten according to guidelines set forth by FNMA (Fannie Mae) and FHLMC (Freddie Mac).  A long time ago, the down payment requirement was 20% which made it hard for many people to qualify.  With mortgage insurance, FNMA and FHLMC have offered low-down payment loans for quite a while.  Borrowers can put down as little as 3% (that’s less than an FHA loan) on a conventional loan – the thing I don’t like about the 3% down loan is that the interest rate is higher as are the mortgage insurance rates.  The 5% down loan has much better interest rates and mortgage insurance rates than the 3% down loan, assuming equal credit scores.  The 10% down loan has even better terms and the terms get a bit better the more you are able to put down.  For move-up homes, if it’s possible, I recommend putting 20% down so that there is no mortgage insurance.  I don’t recommend putting any more money down than 20% because I think there are better uses for the money at that point.  Read this to find out why:  Larger Down Payment vs. Money for Investing.

Conventional guidelines are flexible from the standpoint that you can finance any occupancy type: owner-occupied, 2nd home, and investment property.  Conventional loans also more flexible than FHA in terms of getting rid of the mortgage insurance faster – if you pay the loan down to 80% of the original purchase price, you can request to have it removed; with FHA, the current requirement is that the mortgage insurance must remain on the loan for 11 years regardless of how much you have paid down the loan (this usually isn’t an issue because FHA borrowers have typically moved on to a move-up home or have refinanced for one reason or another well before the 11 year mark).  The maximum loan amount for a conforming loan is $424,100 but is higher in certain areas.  It’s important to know that interest rates on conventional loans are driven by occupancy type, down payment amount, and credit scores.  For most borrowers, occupancy type is owner-occupied (2nd homes are almost identical to owner occupied with the exception of a 10% down payment requirement as of the time of this writing).  Most borrowers are limited as to the amount of down payment which leaves credit scores as the one variable over which they might have some control.  Each situation is different with regard to credit and what can be done to raise the scores so its important to talk to me as early in the process as possible (I’ve worked with some borrowers for two years before they got to where they could qualify) so that we can implement a plan with regard to the options of getting the scores to a level that allows for acceptable interest rates.  The flip side of this is that if a borrower can qualify right now but has scores on the lower side of the qualifying spectrum, it still might be best to buy now since it may cost more to wait if home prices and interest rates are on the rise.