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Guide to Conventional Mortgages in Massachusetts

If you’re new to house-hunting, no doubt you’ve heard about the different mortgage loan options available. But which one is right for you? What are the differences between them? And are there certain options that are better for Massachusetts home buyers?

The primary types of mortgages you’ll encounter are:

  • FHA (Federal Housing Authority): government-insured
  • VA (Department of Veterans Affairs): government-insured
  • USDA (United States Department of Agriculture) Rural Development: government-insured
  • Conventional (Fannie Mae and Freddie Mac): privately insured

 

In this guide, we’ll focus on conventional loans and the options available in the Bay State.

What is a Conventional Mortgage Loan?

A conventional mortgage is a private-sector loan that isn’t backed by the government, and follows the guidelines set by Fannie Mae and Freddie Mac (more on them in the next section). Conventional mortgages are the most common type of loan and account for 60% of all mortgage applications. This is likely due to the fact that private mortgage insurance (PMI) is less expensive for a conventional loan than for a government-backed loan. Conventional mortgages are available for almost any property type; FHA and VA loans, on the other hand, come with some property restrictions.

Conventional Mortgage Loan Key Terms

Before we dive into the details of conventional loans in Massachusetts, it will help to define some key terms.

AMI: Area median income. This refers to the average income of a geographically defined area, and usually informs how much a borrower can make before they can no longer qualify for a home loan.

Credit score: A number determined by an individual’s historical ability to pay their debts, with 300 being the lowest (poorest) score, and 850 being the highest. Lenders use this number to determine an applicant’s eligibility to take out a loan. A “good” credit score is considered anything starting in the mid-600s and up.

DTI: Debt-to-income ratio. This percentage compares how much you earn to how much you owe in rent, mortgage payments, students loans, and other debts. The standard maximum DTI most conventional mortgage lenders will accept is 43%, although there are exceptions.

Fannie Mae and Freddie Mac: These two lending entities were created by Congress in 1938 during the Great Depression in order to “provide liquidity, stability and affordability to the mortgage market.”

Loan limit: A cap placed on loan amounts nationwide, or in specific areas, as determined by the Federal Housing Finance Agency (FHFA). This is usually determined by the property values in a certain county; for example, counties with higher property values will place higher caps on their loan amounts to accommodate higher home prices.

PMI: Private mortgage insurance paid by the borrower. This is a policy that protects the lender if a loan applicant is providing less than 20% for their down payment. This generally costs between 0.5% and 1% of the entire loan annually; rates vary depending on the borrower’s credit rating.

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Conventional Mortgage Limits in MA

As of early 2021, the maximum conforming loan limit for most of Massachusetts was $548,250. Higher-cost areas (like metro Boston and Martha’s Vineyard) cap mortgage loans at $724,500 and $822,375. Search your preferred county to find out its loan limit.

Any conventional mortgage that adheres to the financing limits set by the FHFA is considered a conforming loan.

Non-conforming loans — also known as jumbo loans — exceed the FHFA’s conventional mortgage financing limits. This can be a good option for home buyers who have their hearts set on a larger home and have the means to pay a little more up front. Non-conforming loans usually carry higher interest rates than conforming loans, as well as higher down payments.

FHA vs. Conventional Mortgage: Which Is Better in MA?

While an FHA or VA loan allows borrowers to put as little as 0%–3% down, non-government-backed loans generally have lower limits than a conventional loan. For example, the national loan cap for an FHA loan is $356,362 — roughly $200,000 less than the standard conventional loan limit in Massachusetts, and almost $500,000 less than the limits in the state’s most populous counties!

There are even some conventional loan options that can compete with lower down payment thresholds of their own. This table will help you weigh the pros and cons of government-backed loans compared with conventional loans:

 

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

Conventional Loan Benefits Available in MA

Conventional loans often require 20% down, but there are several options available in Massachusetts that require far less.

Loan Type Requirements
5% down with PMI (Conventional 95) One loan at 95% loan-to-value ratio. PMI required.
Conventional 97 3% down. No income limits.
HomeReady® 3% down. Applicants must be at or below the geographical area’s median income, unless home is located in an 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 Applicants may receive any percentage of the down payment as a gift from family or other eligible source.

 

There are also benefits available exclusively to first time home buyers in MA, furnished by MassHousing.

Down payment assistance for first time home buyers: MassHousing provides cash assistance for up to 5% of the purchase price or $15,000, whichever amount is lower.

Higher income limits: First time home buyers in areas with lower income levels can earn up to 135% of the area median income (AMI), as opposed to the standard 80%; first time buyers can earn up to 100% of AMI in the rest of the state.

Workforce Advantage 2.0: The Workforce Advantage program provides interest-free down payment assistance up to $25,000 to help working families afford their first home. Applicants can earn up to 80% of the AMI, and receive mortgage insurance with job loss protection.

The Pros & Cons of Conventional Loans in MA

For a general summary of the differences between conventional and government-backed loan options, here’s a convenient pros and cons list (hint: bring this to your next meeting with your loan officer so you can discuss).

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.
Conventional mortgage loans don’t have owner occupancy requirements, meaning that they can be attractive to a buyer interested in investment properties. Government-backed loans often require owners to live onsite for a period of time if they purchase a multifamily property.

 

Documents Needed to Qualify for a Conventional Mortgage

There’s a lot of verification that goes into qualifying for a loan: Do you make enough money? Is your credit score high enough? If applicable, will your co-borrower jeopardize your eligibility?

We’ve compiled a handy checklist of all the documents and information you’ll need when you meet with your loan officer.

  • 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 stubsTwo 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.

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Requirements for Conventional Mortgage in MA

As you prepare to explore your conventional loan options in Massachusetts, here are the things your loan officer will want to cover:

  • 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, among other things. See the previous section for a full list.
  • Income & Assets: Lenders will use the documents you provide (specifically bank and investment account statements) to verify that you have sufficient means to cover both the down payment and associated closing costs.
  • Minimum Down Payment: Typically, conventional mortgage loans require a higher down payment than government-backed loans. Most lenders require at least 5% down, and up to 20%. However, there are a few conventional loan options that allow for 3% down. See this table above.
  • Property Type Eligibility: A conventional mortgage can be used for almost any type of property, including warrantable condos, modular homes, manufactured homes and multifamily residences with one to four units. 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.

Questions? Blue Water Mortgage Can Help

If you still have questions that you don’t see answered above, please reach out. Blue Water Mortgage’s team of licensed loan officers has over 150 years of collective credit-based mortgage experience, and we’re well-versed in loan terms throughout New England and beyond.

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 20 years. Roger has originated over 2500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.

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