Also known as conforming loans, conventional loans “conform” to a set of standards set by Fannie Mae and Freddie Mac. Conventional loans boast great rates, lower costs, and homebuying flexibility. So, it’s no surprise that it’s the loan option of choice for over 60% of all mortgage applicants.
Highlights of the conventional loan program:
- Can use to buy a primary residence, second home, or rental property
- Available in fixed rates, adjustable rates (ARMs) with loan terms from 10 to 30 years
- Down payments as low as 3%
- No monthly private mortgage insurance (PMI) with a down payment of at least 20%
- Lower mortgage insurance costs than FHA loans
- Mortgage insurance is cancelable when home equity reaches 20% (unlike FHA which lasts the life of the loan, in most cases)
In this article:
- Conventional mortgage down payment
- Private mortgage insurance (PMI) requirements
- Credit score minimums
- Conventional loans and bankruptcy
- Loan limits for 2020
- Our recommended lenders for new home loans
Conventional Loan Requirements for 2020
Conventional loans require as little as 3% down (this is even lower than FHA loans). For down payments lower than 20% though, private mortgage insurance (PMI) is required. (PMI can be removed after 20% equity is earned in the home.)
Related: Conventional 97% LTV loan program
You may also use gift funds from a parent or eligible non-profit agency to pay for your entire down payment and loan closing costs. Learn more about gift funds here.My Mortgage Insider Tip
Keep in mind, that the more you put down, the lower your overall loan costs. Your down payment amount helps determine your PMI rate and interest rate, which affects your monthly payment amount and overall interest costs.
Bottom line: The higher your down payment, the less you’ll spend monthly and over the life of the loan.Check your conventional loan eligibility here.
The Cost Affects of Your Down Payment Amount
|Scenario 1*||Scenario 2||Scenario 3|
|Down payment %||20%||10%||5%|
|Total interest + PMI over 5 years||$30,548||$38,866||$43,211|
*The scenarios are calculated based on a 30-year fixed rate loan at 4% interest for $200,000.
**Assumes a 720-739 credit score.
PMI is required any time you put less than 20% down on a conventional loan. Once you reach 20% equity in your home, it can be removed though, unlike FHA mortgage insurance which is required for the life of the loan, in most cases.
For those with good credit, private mortgage insurance on conventional loans can cost less than FHA mortgage insurance. Why? PMI is risk-based insurance, like auto insurance, meaning the better your credit history, the lower your premiums. You benefit if you have a clean history.
Each private mortgage insurance company has varying rates for different down payment and credit score scenarios. Make sure your lender shops around for the best PMI cost for you.
For an in-depth comparison of PMI and FHA mortgage insurance, see our post that compares FHA to the Conventional 97 loan.
Can a second mortgage eliminate PMI?
A loan option that is rising in popularity is the piggyback mortgage, also called the 80-10-10 or 80-5-15 mortgage.
This loan structure uses a conventional loan as the first mortgage (80% of the purchase price), a simultaneous second mortgage (10% of the purchase price), and a 10% homebuyer down payment. The combination of both loans can help you avoid PMI, because the lender considers the second loan as part of your down payment.
For an in-depth look at these loans, see our piggyback loan blog post.
In general, conventional loans are best suited for those with a credit score of 680 or higher. Applicants with lower scores may still qualify, but the associated costs may be lower with other loan programs. For example, Fannie Mae and Freddie Mac impose Loan Level Price Adjustments (LLPA) to lenders who then pass those costs to the consumer. This fee costs more the lower your credit score.
For instance, someone with a 740 score putting 20% down on a home has 0.25% added to their loan fee. But, someone with a 660 score putting the same amount down would have a 2.75% fee added. See the complete matrix of LLPAs.
Conventional loan debt-to-income (DTI) ratios
The maximum debt-to-income ratio (DTI) for a conventional loan is 45%. Exceptions can be made for DTIs as high as 50% with strong compensating factors like a high credit score and/or lots of cash reserves.
If you have dings on your credit or don’t have a lot of cash reserves, your maximum DTI may be much lower than 45%. In general, the lower your DTI, the higher your chance of loan approval.
The best way to check the maximum home price for your debt-to-income level is to get a pre-approval from a conventional loan lender.Click here to check your maximum home price.
Income and asset documentation
Like with most other loan types, you’ll be required to provide documentation proving your income and assets. Here’s a list of some of the documentation you may need:
- 60 days of bank statements (all pages)
- 30 days of pay stubs
- 2 years tax returns if self-employed, have rental properties, or non-salary income (retirement, pension, etc.)
- 2 years W2s
- Social security, retirement and/or pension award letters, and 2 years’ 1099s
- Rental agreements for any investment properties currently owned
It is possible to be approved for a conventional loan after a bankruptcy. There are required waiting periods though, and you must demonstrate that you’ve re-established your credit.
The lender must determine the cause and significance of the derogatory information, verify that sufficient time has elapsed since the date of the last derogatory information, and confirm that the borrower has re-established an acceptable credit history.Fannie Mae Guidelines
Required waiting periods after bankruptcy:
Chapter 7 or Chapter 11: A four-year waiting period, measured from the discharge or dismissal date is required. A waiting period two years is possible, if extenuating circumstances can be documented, such as job loss that is not expected to recur.
Chapter 13: Two years from the discharge date or four years from the dismissal date. With extenuating circumstances, a waiting period of two years is possible from the dismissal date.
A bankruptcy is never a good thing on your credit report, but it doesn’t necessarily disqualify you from ever getting another mortgage.See if you are eligible for a conventional loan here.
Conventional Loan Guidelines 2020
The conventional loan limit for 2020 is $510,400 for a single family home. Though, Fannie Mae and Freddie Mac have designated high-cost areas where limits are higher. For example, a single-family home in Seattle, Washington could have a maximum loan of $592,250. The same home located in Los Angeles, California would be eligible for a loan amount up to $636,150.
Increased loan amounts are also available for 2-, 3-, and 4-unit homes. For multi-unit homes located in high-cost areas, loan limits are even higher. For example, a 4-unit home in Honolulu, Hawaii can be financed up to $1.2 million.
Standard conventional loan limits:
- 1-unit home: $510,400
- 2-unit home: $653,550
- 3-unit home: $789,950
- 4-unit home: $981,700
Eligible properties for conventional financing
- Single-family homes (detached homes)
- Planned Unit Developments (PUDs), which typically consist of detached homes within a homeowner’s association
- 2-, 3-, and 4-unit properties
- Some co-op properties
- Manufactured homes (although few lenders offer this program)
Conventional loans for condominiums
Many condo projects across the country are eligible for conventional financing. There are some specific guidelines that must be met, though. For newly built or converted condo projects, there may be some additional exceptions. If you are unsure if a unit in a condo project you are interested in meets these guidelines, ask your real estate agent or loan officer.
Here are some of the guidelines a condo must meet to be eligible:
- All common areas must be complete and owned by the unit owners or HOA
- At least 51% of the total units in the project must be owner occupied or second homes
- The HOA must have an adequate budget
- At least 90% of the units must be sold and currently owned by unit owners (existing projects)
- No single entity may own more than 10% of the units in the project
- The project must be adequately covered by insurance
Second homes and investment/rental properties
Unlike government loan programs, conventional loans can be used to purchase a second home or a rental property. Interest rates and down payment requirements are higher when financing a rental home, but the conventional loan remains one of the few loan programs available to purchase rental properties.Click here for today's rental property and second home interest rates.
I’m ready to apply for a conventional loan
Conventional loans are a great option for today’s homebuyer. They offer great rates and low fees. Down payment requirements are as low as 3%, and the private mortgage insurance (PMI) is cancelable when home equity reaches 20%.Click here to check today's conventional loan rates.