Backed by private lenders, conventional loans are not written by government agencies, so generally offer more choices.
What is a Conventional Loan?
A conventional loan is a mortgage loan that’s not backed by a government agency and are the most common type of residential loan. Loans that are not called conventional are government programs such as FHA, VA and USDA loans.
Conventional loans can be broken down into two categories: conforming and non-conforming (also called “jumbo” loan). The loan limits that determine which category they in are are set each year by the Federal Housing Finance Agency — conforming loans are under the limit, non-conforming are over. Loan limits vary by state, district or territory, and number of units. So, for example, a 3-family home in Suffolk County, NY that needs an $1,000,000 loan might qualify for conforming, while the same $ amount for a single family home would be considered a Jumbo loan. Likewise, some localities have higher property values and my be governed by “high balance” limits.
Though not backed by a government agency, conforming loans are still guaranteed by two government-sponsored enterprises, Fannie Mae and Freddie Mac. As a result, they have strict lending requirements. Private lenders, such as banks, credit unions, and mortgage companies, issue conventional loans to borrowers. This year’s loan limits:
FHFA Loan Limits for 2023
Number of Units
What are the Minimum Requirements for a Conventional Loan?
Conforming and non-conforming (jumbo) loans have different qualification requirements.
If you’re looking to obtain a conforming home loan, you must have a credit score no less than 620, though a credit score of 720 will get you the best rates. But if you’re looking to obtain a jumbo loan, you must have a minimum credit score of 700.
Cash in Reserves
For a conforming loan, you need at least three months’ worth of payments or PITI (principal, interest, taxes, and insurance) in available funds. For a jumbo loan, you need at least six months’ worth of PITI. These include a checking account, a savings account, a money market account, Treasury Bills, and certificates of deposit.
Down Payment and Loan-to-Value Ratio
For a conforming loan, your down payment and loan-to-value (LTV) ratio have an inverse relationship. For a single-family home, you can put as little as 3% down – that’s a 97% loan-to-value (LTV) ratio. However, these numbers vary by the number of units. See chart below. For a jumbo loan, your down payment varies across lenders. You can expect to put 10% down.
Conforming Down Payment Requirement
Number of Units
Minimum Down Payment
Many lenders have adopted the 28/36 rule. 28 is the ratio of your proposed monthly mortgage payment, otherwise known as PITI, to your income; 36 is the ratio of all your current payment obligations to your income. The truth is, nowadays you can get a conforming home loan with a DTI as high as 43% – but this number varies across lenders. Learn what goes into calculating your DTI here.
Know Your Options – Common Types of Conventional Loans
There are different types of conventional loans. Not all will be available to all borrowers. Here’s an overview:
- A conventional loan is a mortgage loan that’s not backed by a government agency. These loans come in all shapes and sizes, and while they don’t provide some of the benefits as FHA, VA and USDA loans, conventional loans remain the most common type of mortgage loan
- Non-conforming (Jumbo) Conventional Loans: A loan that exceeds the national loan limits set by the Federal Housing Finance Agency (FHFA) and is used to finance high-cost or luxury properties.
- Non-qualified Mortgages: A loan that uses non-traditional methods of income verification to help borrowers who don’t meet the qualifying criteria to finance a home.
- Portfolio Loans: A loan that a lender originates and retains instead of selling it to the government-sponsored enterprises, Fannie Mae and Freddie Mac. These loans may be offered to those who don’t meet the qualifying criteria set by the FHFA.
- Subprime Conventional Loans: A loan that’s issued to borrowers with a 600 or less credit rating, a DTI ratio greater than 50%, or who are self-employed at a high-interest rate.
- HomeReady® Loan: A loan designed by Fannie Mae to help credit-worthy, low-to-moderate income borrowers become homeowners. Unlike conforming loans, you can have a DTI as high as 50% and fund your entire down payment with gift funds (applicable for single-unit family homes).
- Home Possible® Loan: A loan designed by Freddie Mac to help credit-worthy, low-to-moderate income borrowers and have similar qualifications as a HomeReady® loan. There is no minimum borrower contribution for single-unit homes nor counts non-borrower income as a compensating factor.
- Piggyback Loan or 80/10/10 Loan: A loan that allows borrowers to use two mortgages simultaneously. The first mortgage comprises 80% of the home price, the second mortgage covers 10%, and the remaining 10% goes towards the down payment.
As always, you’ll want to talk to an Ark Advisor to compare your options and find the path to ownership that helps your family achieve generational growth.