A conventional mortgage (also known as a conforming mortgage) is a home loan that is not insured or guaranteed by the government.
The Federal government backs (insures) all FHA, Veteran, and USDA mortgages. The alphabet loans (FHA, VA, and USDA) impose significant upfront and monthly mortgage insurance premiums (MIP). If the down payment is 20% or higher, the conventional loan does not require upfront mortgage insurance and does not require monthly mortgage insurance.
The conventional loan conforms to the Federal Home Loan Mortgage Corporation's (Freddie Mac) and Federal National Mortgage Corporation's (Fannie Mae) underwriting guidelines.
Think of the conventional mortgage as your father and grandfather's mortgage. Typically, down payments are five, ten, fifteen, or twenty percent; or higher. A deposit of less than 20% is required.
Conventional Loan Requirements
- Conforming Loan Limits: 1-unit home, $510,400
- Conventional Mortgage Programs: Fixed and adjustable
- Co-signer and Co-borrower: Yes, but it's complicated
- Credit Score Requirement: 620 for fixed-rate and 640 for adjustable
- Gift Funds: Down payment and closing costs to 100%
- Minimum Down Payment: Usually 5%, or 3% for niche programs
- Occupancy Types: Owner occupied, second home, and investment
- Private Mortgage Insurance (PMI): Required with less than 20%
- Seller Paid Closing Costs (seller assist): Allowed
- Upfront Mortgage Insurance: Not required
Conforming loan limits
The maximum loan amounts are established each year by the Federal Housing Finance Agency (FHFA). The 2021 lending limits are:
- 1-unit home: $548,250
- 2-units (duplex): $702,000
- 3-units: $848,500
- 4-units: $1,054,500
There are certain exceptions for counties with a high cost of living. The high cost counties can be found via the U.S. Department of Housing and Urban Development (HUD) under Fannie/Freddie.
Conventional mortgage programs (fixed-rate and adjustable)
Co-borrower and co-signer
The conventional loans do permit co-signers and co-borrowers, although, the conventional loans are more restrictive than FHA mortgages.
Credit score requirement
A fixed-rate mortgage requires a minimum credit score of 620. A credit score of 640 is required for adjustable-rate mortgages.
Gift money for down payment and closing costs
The down payment gifting requirements begin on page 427 of the Fannie Mae selling handbook.
For loans with a 20% or more down payment on the acquisition of a one- to four-unit primary house or second home, all monies necessary to complete the transaction may come from a gift and there is no minimum borrower contribution required. If the down payment is less than 20% and the home is a single-family primary dwelling, the entire amount can be gifted.
For two- to four-unit primary residences or second houses with a down payment of more than 20% (i.e., 5%, 10%, or 15%), the borrower must provide a minimum borrower contribution of 5% from his or her own assets.
A gift may be made by a family member, which includes the borrower's children, spouse, or other dependents, or by another person who is connected to the borrower by marriage, blood, adoption, or legal guardianship; or by a fiancée, fiancé, or domestic partner. The contributor of the gift may not be, nor may he or she have any relationship with, the developer, builder, real estate agent, or any other party to the transaction.
Gift funds may be used to cover all or a portion of the down payment, closing expenses, or cash reserves, subject to the appropriate minimum borrower contribution.
Gifts are not permitted on an investment properties.
Minimum down payment
The minimum down payment requirement is 5%, however Fannie Mae provides two 3% down payment options.
The HomeReady program does not require first-time home buyers, but households must earn at or below 80% of the county median income.
The conventional 97 percent financing program is limited to loan applications that include at least one first-time home buyer.
Property types include primary residences (one to four units), second homes, and investment properties.
Private mortgage insurance (PMI)
Conventional mortgages require a 20% down payment, but many prospective house purchasers are unable or unwilling to pay this amount. The down payment requirement can be met by purchasing mortgage insurance from a private firm.
You do not need to get mortgage insurance on your own; the lender will do it on your behalf. The cost of private mortgage insurance is determined by your credit score, down payment percentage, loan amortization (fixed or adjustable-rate) and a few more variables.
There are four payment methods available. The monthly payment option is the most common PMI program.
Additionally, the PMI firms offer single-payment (lump sum) mortgage insurance, split-payment mortgage insurance, and a new alternative called lender-paid mortgage insurance.
The LPMI compensates the borrower with a higher interest rate in lieu of mortgage insurance.
Seller paid closing costs (seller assist)
The home seller is allowed to pay a portion of the closing and prepayment fees incurred by the buyer. The amount of help is restricted to the proportion of the down payment:
Down payment percentage
3% - 9%
10% - 25%
26% and greater
Upfront mortgage insurance
Unlike the FHA, USDA, and VA, loan programs, conventional loans do not require up front mortgage insurance.
Frequently Asked Questions About Conventional Mortgages
Can a first-time home buyer to get a conventional loan?
First-time home buyers are eligible for a conventional loan. In fact, Fannie Mae Conventional 97% loan program targets first-time home buyers.
Can closing costs be included in a conventional loan?
No, closing costs cannot be financed with a conventional home loan.
Can you refinance a conventional loan?
Yes, conventional loans can be refinanced.
Do conventional loans require flood insurance?
The requirements for flood insurance can be found on page 885 of the Fannie Mae mortgage manual. Here's what it says, in part:
Fannie Mae requires flood insurance on any property with a residential building, residence, structure, or improvement that is located in a Special Flood Hazard Area (SFHA) with federally mandated flood insurance purchase requirements, or in the Coastal Barrier Resources System or Other Protected Area. (Fannie Mae)
What are the conventional home loan credit score requirements?
Fannie Mae requires a 620 minimum credit score for fixed-rate loan mortgages and 640 for adjustable-rate mortgages.
Do conventional loans have PMI?
If the loan is 80% or higher, then yes
How much is PMI on a conventional loan?
The cost of PMI depends on the mortgage insurance program chosen (there are 4 ways to pay the PMI), the down payment and the loan to value, credit score, and type of loan (i.e. fixed or adjustable interest rate.
How to remove PMI on a conventional loan?
See: Get rid of PMI insurance
Is a conventional loan better than FHA?
The choice between an FHA loan and a conventional loan is dependent on the borrower's circumstances. For example, if the credit score is low, the FHA program is better. If the credit score is high and there is a 20% down payment, a conventional loan will probably outdo an FHA loan. Everyone's situation is different.
Is a conventional loan federally backed?
Fannie Mae and Freddie Mac are technically backed by the Federal Government. If one or both corporations are on the precipice, the Feds will jump in to save the companies because Fannie and Freddie hold as much as 50% of the mortgages in the United States.
What are the benefits of a conventional home loan?
The biggest advantage that conventional loans have over the government backed mortgages are the higher loan amounts, no upfront PMI, and no PMI with loan amounts at 80% or less.