What is a Conventional Mortgage?
A conventional mortgage is not guaranteed or insured by the federal government. A conventional loan refers to a mortgage that follows the guidelines of government sponsored enterprises (GSE’s) such as Fannie Mae or Freddie Mac.
Conventional mortgages can be classified as conforming or non-conforming. A conforming loan meets the parameters set forth by Fannie Mae or Freddie Mac. A non-conforming loan is one which exceeds the maximum loan limits established by Fannie Mae and Freddie Mac.
How a Conventional Mortgage Works
Conventional loans can be insured or uninsured. The insurance for conventional loans is referred to as Private Mortgage Insurance (PMI). PMI is an insurance policy issued to provide protection to the lender in the event of financial loss due to a borrower’s default. Generally a loan over 80% of the property’s value will require PMI insurance.
A strong credit history is a typical requirement for a conventional mortgage. Lenders tend to offer lower rates to borrowers who have clean credit histories and higher credit scores.
Conventional programs typically require a 5% down payment which must come from the borrower’s own funds. After the initial 5% contribution, the remaining funds may be a gift to the homebuyer from a conventional allowable source. Gift funds that meet or exceed 20% of the property’s value do not require a minimum borrower contribution.
Conforming loan limits are set by Fannie Mae and Freddie Mac (GSE’s) and are evaluated on an annual basis.
Purchase and Refinance transactions are eligible for conventional loan programs.
Highlights of the Conventional Loan Program:
- Allows both owner-occupants and investors to purchase or refinance1-4 units, townhouses, approved condos or PUDs
- Allows for the purchase or refinance of single family second homes
- Typically has a 5% down payment
- Gift funds are allowed after the borrower’s initial 5% contribution
- Allowable seller contributions are dependent upon the down payment and occupancy
- No first-time homebuyer restrictionsCo-signers are allowed to help buyers qualify for single family residences
- Conforming loan limits apply
You will benefit from the Conventional loan program if you
- have a 20% or greater down payment
- need financing for a second home or an investment property
- desire the ability to waive the requirement to escrow for taxes and insurance with a down payment of 20% or greater
- need to finance a property that exceeds FHA loan limits
- are looking for flexible PMI requirements for loans with down payments less than 20%
To speak with a mortgage specialist at Homestead Funding to see if a Conventional mortgage is right for you, click on the "Find A Loan Originator" button below.