What is a Conventional Loan?
A conventional loan is simply a loan that isn’t a VA loan or FHA loan. It isn’t backed by the government and therefore has stricter requirements.
Conventional loans have to meet bank-funding criteria set by Fannie Mae (FNMA) and Freddie Mac (FHLMC). Both of these stock-holding companies buy mortgage loans from lending institutions and secure them for resale to the investment community. Every year, form October to October, Fannie Mae and Freddie Mac establish limits on what constitutes a conforming loan in a mean home price.
Buying back mortgage loans allow these agencies to provide a continuous flow of affordable funding to banks that reinvest their money back into more mortgage loans. Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market – effectively decreasing the demand for non-conforming loans.
Conforming Loan Limits:
|Number of Units||Maximum original principal balance||Alaska, Guam, Hawaii, and U.S. Virgin Islands only|
NOTE: The conforming loan limit in Alaska, Hawaii, Guam and the Virgin Islands is 50% higher.
How do I apply for a Conventional Loan?
Applying for a conventional loan requires a borrower to fill out a mortgage application (form 1003 called the Uniform Residential Loan Application) with us. This is a lengthy application that documents your personal information (Social Security Number, date of birth, etc.), employment information, assets and liabilities, mortgage terms and much more. You’ll want to work with us to complete all fields, especially as they relate to the type of mortgage and terms. Give us a call and we can guide you through the process.
Once you and any co-borrowers have completed and signed the application, we will:
- Pull your credit report and score from all three major agencies to verify your credit history. Make sure you know what they find.
- Evaluate the four C’s to determine if you are creditworthy:
- Capacity – Current and future ability to make payments
- Capital or cash reserves – Money, savings and investments you have that can be sold quickly for cash
- Collateral – The property that you will purchase
- Credit – Your history of paying bills and other debts on time
At this point, your lender can provide you with a pre-approval letter that outlines how much you qualify to borrow and the specific terms of the loan.
Conventional Loan Requirements
Conventional loans are more strict on credit profiles and guidelines. You will need 20% down below a minimum 660 fico score to qualify for any conventional loan because there is no mortgage insurance required. If you have a minimum 660 fico score, you may qualify for 5% down standard conventional or a minimum 700 fico may qualify for only 3% down conventional, both with mortgage insurance. Conventional financing conforming loan limits is up to $417,000 and up to $625,500 is conforming High Balance and from $625,500 up to 2 million is Jumbo.
Conventional loans also have a longer timeframe for BK and foreclosure/short sales as well. You will have to wait 4 years after a BK to qualify for a conventional loan and 7 years after a foreclosure/short sale. There are special circumstances to shorten those timeframes. You may qualify to buy 2 years after a short sale with 20% down payment and minimum 660 fico score.