The 2020 Conventional Mortgage Guide: Limits, Requirements & Alternatives Roger Odoardi What is a Conventional Mortgage? A conventional mortgage is a private-sector loan that isn’t backed by the government (unlike, say, an FHA or VA loan) and that follows the guidelines set by Fannie Mae and Freddie Mac. To those unfamiliar, Fannie Mae and Freddie Mac are two entities that were created by Congress in order to “provide liquidity, stability and affordability to the mortgage market.” Conventional mortgages are the most common type of loan and account for 60% of all mortgage applications, likely due to the fact that private mortgage insurance (PMI) for a conventional loan is cheaper than for a government-backed loan and that conventional mortgages are available for almost any property type. There are two types of conventional loans: conforming loans and non-conforming loans. A conforming loan refers to any conventional mortgage that conforms to the financing limits set by the Federal Housing Finance Agency (FHFA). According to a recent news release from the FHFA, the 2020 maximum conforming loan limit for single-family homes is $510,400, however, the limit for high-cost areas is $765,600. As their name implies, non-conforming loans — also known as jumbo loans — exceed the FHFA’s conventional mortgage financing limits. Non-conforming loans typically have higher interest rates and higher down payments than conforming loans. What Are the Requirements for a Conventional Mortgage? As with any type of home loan, there are certain requirements a borrower must meet in order to qualify for a conventional mortgage: Credit Score: The minimum credit score to qualify for a conventional mortgage ranges from 620 to 640, depending on the lender. Documentation: Borrowers applying for a conventional mortgage will need to provide documentation detailing their income and assets, amongst other things. This documentation typically includes: Two years’ worth of employment information A list of assets and liabilities Government-issued identification Two years’ worth of W-2s 30 days’ worth of pay stubs Two to three years’ worth of income tax returns IRS Form 4506-T (signed and dated) Two to three months’ worth of bank statements Two to three months’ worth of investment account statements Gift letter (if using gift funds) Credit report Bankruptcy/discharge papers for any documented bankruptcies Renting history Borrowers who are self-employed are required to present additional documentation, including proof of income, a current profit and loss statement and a list of all business debts. Income & Assets: Lenders will use the documentation list above (specifically bank and investment account statements) to verify that the borrower has sufficient means to cover both the down payment and associated closing costs. Down Payment: Typically, conventional loans require a higher down payment than government-backed loans, with most lenders requiring at least 5% down. However, there are a few conventional loan options that allow for 3% down — more on that in just a bit. Down Payment 20% 10% 5% Loan Amount $240,000 $270,000 $285,000 PMI Rate 0% .17% .25% Monthly Payment $1,077.71 $1,212.42 $1,279.78 PMI Amount $0.00 $38.25 $57.00 Total Interest + PMI over 5 years $39,936 $47,223 $50,843 **Disclaimer: This chart is for illustration purposes only and is not an offer to lend. Assuming credit score of 760, Single family residence, debt ratio within program guidelines, conventional loan, using an interest rate of 3.5% to illustrate monthly payment. Please consult a Blue Water Mortgage Loan Officer for a personalize estimate.** Loan Type Requirements 5% down with PMI (Conventional 95) One loan at 95% loan-to-value. PMI required. Conventional 97 3% down. No income limits. HomeReady® 3% down. Must be at or below the geographical area’s median income unless home is located in underserved area. 90% loan One loan with 10% down. PMI required. Piggyback 80/10/10 10% down, 10% second mortgage, and 80% conventional loan. No PMI required. Home Possible Advantage 3% down loan with income restrictions. Offered by Freddie Mac home lenders Down Payment Gift Applicant may receive any percentage of the down payment as a gift from family or other eligible source. Eligible Property Types: One of the many benefits to applying for a conventional mortgage is that they can be used for almost any type of property, including single-family homes, multi-unit properties and rehab properties. Unlike government-backed loans, conventional loans do not have any owner occupancy requirements, which makes them an excellent option for second homes or investment properties. Debt-to-Income Ratio: Most conventional mortgage lenders will allow for a maximum DTI of 43%. Private Mortgage Insurance: Any borrower who applies for a conventional mortgage and pays less than 20% down on their home is required to pay PMI. PMI for a conventional loan generally costs between 0.5% and 1% of the entire loan on an annual basis, though this varies depending on the borrower’s credit rating. What Are Some Alternatives to 5% Down Conventional Loans? As we mentioned earlier, there are a few conventional loan options that allow for as little as 3% down, starting with the Conventional 97. So-called because it allows borrowers to have a loan-to-value ratio as high as 97%, Fannie Mae and Freddie Mac introduced the Conventional 97 program back in 2014 to compete with the FHA loan’s 3.5% down payment requirement. In order to qualify for a Conventional 97 loan, a borrow cannot have owned a property within the past three years, must have a minimum credit score of 620 and must have a DTI of no more than 43%. A Conventional 97 loan is a conforming loan, must be a fixed-rate mortgage with a term not exceeding 30 years and can only be used on owner occupied properties. Fannie Mae also offers the HomeReady® mortgage program, which includes a 3% down payment option, as well as co-borrower flexibility and additional income sources, such as rental income. In order to qualify for a HomeReady® loan, borrowers must earn an income less than or equal to the area median income (AMI), have a minimum credit score of 620 and must participate in an online homeownership class offered by Framework. Finally, Freddie Mac offers a 3% down conventional mortgage in the form of its Home Possible Advantage® program. The Home Possible Advantage® program is similar to Fannie Mae’s HomeReady® program in that both are designed to make homeownership possible for responsible buyers who may not otherwise be able to afford it. Even the requirements to qualify Home Possible Advantage® loan are effectively the same, right down to the AMI requirement. Borrowers interested in this program can see whether they’re eligible using Freddie Mac’s Home Possible Income and Property Eligibility Tool. How Do Conventional Loans Compare to Other Loan Types? If you’re on the fence about which loan type is right for your situation, hopefully this chart will help you see how conventional mortgages stack up to the competition: Conventional FHA VA USDA Backed By Fannie Mae or Freddie Mac U.S. Federal Housing Administration U.S. Department of Veteran Affairs U.S. Department of Agriculture Min. Credit Score 620-640 (depending on the lender) 500-580 (depending on the lender) No minimum credit score requirement No minimum credit score requirement Max DTI 35% (though some lenders accept 43%) 45%-50% (depending on the lender) 41% 41% Min. Down Payment 5% (though 3% down options are available) As low as 3.5% down $0 down payment $0 down payment Eligible Property Types Any property type, including second homes and investment properties Primary residences only; property must be owner occupied Primary residences only; property must be owner occupied Primary residences only; property must be owner occupied PMI No PMI for borrowers who put 20% down; between 0.5% and 1% for all other borrowers PMI comes with an upfront premium of 1.75% of the loan amount; between 0.45% and 1.05% for the remainder No PMI No PMI Other Notes Borrowers can apply for either a conforming or non-conforming loan Borrowers can also apply for an FHA 203(k) renovation loan Available only to active-duty veterans w/ 90+ days of service during wartime or those who served 181 days continuous active duty during peacetime Only low- to-moderate income buyers in rural USDA-approved areas are eligible What Are the Pros & Cons of Conventional Loans? To refresh, let’s go over the advantages and disadvantages of conventional mortgage loans: Pros Cons With a conventional loan, borrowers have a choice of 15, 20, 25 or 30-year mortgage terms. Conventional loans have a higher minimum credit score requirement than government-backed loans. Conventional mortgages are available as fixed-rate or adjustable rate mortgages. Conventional loans require a higher down payment than government-backed loans. Borrowers can apply conventional loans to almost any type of property. Conventional mortgages are typically harder to qualify for. Depending on the type of conventional mortgage, borrowers could pay as little as 3% down. Conventional mortgages come with strict income guidelines. Conventional loan borrowers are eligible to borrow more than other loan types. Conventional loans have slightly higher rates than government-backed loans. Borrowers can avoid PMI by putting 20% down, or even cancel their PMI. Borrowers must have reserve money left over in the bank after their down payment. Any Questions? Have any questions about conventional mortgage loans that you don’t see answered here? Blue Water Mortgage can help. Our team of licensed loan officers boast over 150 years of collective credit-based mortgage experience and, in that time, we’ve dealt with our fair share of conventional mortgages. Feel free to contact us with any questions you might have about conventional loans or any other loan type, or to get started on your journey to homeownership. Roger Odoardi Roger is an owner and licensed Loan Officer at the Blue Water Mortgage office in Hampton, NH. Roger graduated from the University of New Hampshire Whittemore School of Business and has been in the mortgage industry for over 15 years. Roger has originated over 1500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.