CONVENTIONAL LOANS
A Conforming Loan "conforms" to the Federal Housing Finance Agency's (FHFA) set of standards, which include credit, debt, and loan size. Conforming loan limitations for 2022 are $647,200 in most places and $970,800 in more costly ones.
Non-Conforming Loans are those that do not fulfill FHFA guidelines. They could be for larger homes, or they could be offered to borrowers with poor credit or who have suffered serious financial setbacks, such as bankruptcy.
CONVENTIONAL LOAN REQUIREMENTS
CREDIT SCORE
Mortgage lenders require a minimum credit score of 620 to qualify for a conventional loan — but that is all that is required. To get the highest interest rate and contract, you'll need a considerably higher credit score, often 740 or above.
PRIVATE MORTGAGE
INSURANCE
The idea of putting down only 3% is an appealing feature of conventional mortgages, but it comes with a disadvantage: private mortgage insurance (PMI). Because you did not make a 20% down payment, PMI protects the lender in the event of a default. So, until you accumulate 20 percent equity in the home — either by paying down your mortgage or upping your home’s value — you’ll need to pay the additional cost of PMI.
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DEBT-TO-INCOME RATIO
Your DTI ratio takes into account other monthly expenses such as vehicle loans, school loans, and credit card debt. Most lenders will not allow this ratio to surpass 43%, while some may make an exception and allow up to 50%.
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LOAN SIZE
The final phase toward obtaining a conventional loan is determining how much money you need to borrow. Each year, the Federal Housing Finance Agency (FHFA) establishes restrictions for conforming conventional loans. These differ depending on where the property is located. The maximum for 2021 in the majority of the United States is $548,250. Limits of $822,375 apply in higher-priced locations like California and New York City. Anything greater will necessitate a jumbo loan.
DOWN PAYMENT
Unlike some government-insured loans, a lender isn’t going to give you 100 percent of a home’s purchase price in a conventional loan — you’ll need to be able to make a down payment. Many fixed-rate conventional loans for a primary residence (not a second home or investment property) allow for as little as a 3% or 5% down payment. If you take out a 3-percent down conventional loan to buy a $350,000 house, for example, you'll need to put down at least $10,500.
TYPES OF CONVENTIONAL LOAN
Conforming loans are mortgages that fall within the FHFA's guidelines. This means they can be purchased through the secondary mortgage market by two government-sponsored enterprises (GSEs). Lenders receive funds to continue making new mortgages by selling these sorts of loans.
01. CONFORMING LOANS
Jumbo Loans or Non-Conforming Loans are mortgages that surpass conforming loan limitations. These are loans that cannot be sold to GSEs but are still available to well-qualified borrowers seeking a more flexible conventional loan option. Furthermore, jumbo loan rates are often higher than those of smaller mortgages.
02. JUMBO LOANS
Non-Qualified Mortgages, often described as Non-QM loans on lenders’ websites, also cannot be purchased by GSEs, but they can be an option for those who are able to afford a mortgage but maybe are unable to meet the credit or DTI requirements. These borrowers typically fall outside of the "ability to repay" guidelines put in place following the 2008 financial crisis, which indicate whether a borrower is likely to repay a mortgage.
03. NON-QUALIFIED MORTGAGES
PROS
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Can be used for a primary residence, a second residence, or an investment property.
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Even though interest rates are slightly higher, overall borrowing expenses are often lower than for other forms of mortgages.
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You can ask your lender to cancel private mortgage insurance (PMI) once you've reached 20% equity, or you can refinance to get rid of it.
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On GSE-backed loans, you can put down as low as 3%.
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Sellers can help with closing fees.
CONS
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A minimum FICO score of 620 or above is frequently required (the same applies for refinancing)
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A higher down payment is required than with some government loans.
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A debt-to-income (DTI) ratio of no more than 43% is required (50 percent in some instances)
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If your down payment is less than 20% of the sales price, you will most likely be required to pay PMI.
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Documentation is needed to demonstrate income, assets, down payment, and employment.
CONVENTIONAL vs FHA vs VA vs USDA
Conventional
FHA
VA
USDA
3% down payment minimum
3.5% down payment minimum
No down payment required
No down payment required
620 credit score minimum
580 credit score minimum with 3.5% down (500 credit score minimum with 10% down)
620 credit score or higher (depends on lender)
43% DTI maximum (in most cases)
50% DTI maximum
Can cancel mortgage insurance with 20% equity
Mortgage insurance includes one-time premium upfront and annual premiums
Must pay VA funding fee ranging from 1.4% to 3.6%
Must pay 1% guarantee fee upfront and annual fees (currently 0.35%)
Can be used for second or vacation homes and investment or rental properties
Can only be used for primary residences
Available to anyone who qualifies, regardless of income
Available to low- to moderate-income borrowers (in most counties, the income limit is $90,300)
Property can be located anywhere
Property must be located in a USDA-approved area
