Conforming conventional loans follow lending rules set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). However, some lenders may offer some flexibility with non-conforming conventional loans.
How Conventional Loans Work
Conventional loans are originated and serviced by private mortgage lenders like banks, credit unions and other financial institutions, many of which also offer government-insured mortgage loans. In general, conventional loans don’t have some of the same perks as government-insured loans, such as low credit score requirements and no down payment or mortgage insurance.
It’s possible to get approved for a conforming conventional loan with a credit score as low as 620, although some lenders may look for a score of 660 or better. Even if you can qualify for a conventional loan, though, your interest rate will largely depend on your credit score and overall credit history. The better your credit is, the less you’ll pay in interest over the life of the loan.
You can find conventional mortgage loans with a down payment requirement as low as 3%, and some lenders have special programs that offer up to 100% financing. However, if you don’t put down 20% or more, the lender typically requires you to pay private mortgage insurance, which can cost between 0.3% and 1.5% of your loan amount annually.
Conventional loans typically run for 30 years, but it’s possible to qualify for a 15- or 20-year conventional mortgage loan.
How Is a Conventional Loan Different From a Government-Backed Loan?
Government-insured mortgage loans have special features that can make them a good fit for certain homebuyers. Here’s a quick summary of each option and who might consider it:
- FHA loans: These loans allow you to get into a home with a credit score as low as 500 if you have a 10% down payment, or 580 if you have a 3.5% down payment. This may be a good option if your credit score isn’t high enough to qualify for a conventional loan.
- VA loans: Backed by the U.S. Department of Veterans Affairs, VA loans are designed for select members of the military community, their spouses and other beneficiaries. They don’t require a down payment and don’t charge private mortgage insurance.
- USDA loans: Insured by the U.S. Department of Agriculture, these loans can help low- to moderate-income homebuyers who want to purchase a home in an eligible rural area. They don’t require a down payment and provide a little more flexibility with credit score requirements.
While these loans are insured by various government agencies, it’s private lenders that offer them to borrowers—the same lenders that also offer conventional loans. Beyond special programs some lenders may offer, conventional loans don’t have many of the perks government-insured loans provide across the board.
If you’re trying to decide between a conventional loan and a government-insured loan, the right one for you depends on your financial situation. If you have high credit scores of at least 740 and you can afford to make a 20% down payment, a conventional mortgage may offer the best interest rate and lowest fees.
Because of the strict eligibility requirements that come with VA and USDA loans, it can also be easier for many homebuyers to qualify for a conventional mortgage.
If your credit scores are currently low, however, you may find it easier to obtain an FHA-insured loan. Just keep in mind that FHA-insured loans charge their own form of mortgage insurance, called the mortgage insurance premium, that includes an upfront fee and ongoing charges that add to your mortgage cost.
Improving your credit score before you apply for a mortgage can help you qualify for a conventional mortgage and may also reduce the mortgage interest rate and fees to obtain the loan.
What Are the Types of Conventional Loans?
There are several types of conventional loans that you may come across as you compare lenders and mortgage options. Here are some of the most common ones and how they work.
Conforming Conventional Loans
Conforming conventional loans are loans that adhere to the standards set by Fannie Mae and Freddie Mac, including maximum loan amounts.
The Federal Housing Finance Agency (FHFA) recently announced the 2022 conforming loan limits and, to no one’s surprise, loan limits have increased significantly to $647,200 in most areas of the country. The 18% increase is the largest year-over-year jump in loan limits in recent history. This could be a real benefit to transferees looking to relocate who need some additional buying power.
The FHFA is responsible for setting conforming loan limits (CLL) for Fannie Mae and Freddie Mac, two government-sponsored enterprises that purchase mortgages and repackage them into mortgage-backed securities for investors. This delicate ecosystem allows investors to help provide the liquidity lenders need to continue providing affordable home loans to the public.
Since 1975 the FHFA has been collecting and analyzing data from across the country. Information from millions of real estate transactions are compiled to create the FHFA’s House Price Index (FHFA HPI®). The House Price Index gives housing economists an analytical tool to help estimate mortgage defaults and housing affordability.
Jumbo Conventional Loans
If you want to borrow more than the lending limits for conforming loans, you should look for lenders that specialize in jumbo mortgage loans.
Jumbo loans typically require higher credit scores than conforming loans (think 700 or higher), and you may also need to have a lower debt-to-income ratio (DTI) and put down a larger down payment.
Even with those things, you may end up with a higher interest rate than a conforming loan because the larger loan amount represents a bigger risk to the lender.