The majority of mortgage loans made in the conventional loan market adhere to the underwriting guidelines of Freddie Mac and Fannie Mae for conforming loans. Conventional loans are by definition “conforming” if they are generally $417,000 or a lesser loan amount for a single-family residence. Conforming loan limits are designated by area and can reach up to $625,000 in some states such as Hawaii and Alaska, but for the most part $417,000 is the most wide-spread conforming loan limit. Conventional loan limits greater than $417,000 are considered “nonconforming” loans, or jumbo, and the interest rates are normally substantially higher.
Conventional loans through Freddie Mac and Fannie Mae have established guidelines, or pricing tiers, for borrower credit scores, loan-to-value ratios, minimum down payments, and income requirements. For instance, most conventional mortgage purchase loans require a minimum 3% to 20% down payment range and allow for a 100% gift from blood or by-marriage relatives. Two of the most important factors when purchasing a home with a conventional loan are the term of the loan and loan-to-value ratio (LTV), or down payment amount:
- 97% LTV with a 30-year term
- 95% LTV with a 30-year term
- 90% LTV with a 30-year term
- 85% LTV with a 30-year term
- 80% LTV with a 30-year term
The term of the loan can vary from longer or shorter depending on the borrower’s preference and ability to qualify. A shorter-term mortgage will typically result in a lower interest rate.
There are a number of benefits in refinancing to a conventional mortgage. Normally, conventional mortgages offer lower interest rates than most other loan programs. This is primarily the result of wholesale lenders’ ability to bundle these loans and sell them in the secondary market. Accompanying the bulk sales of mortgage loans is the reduced credit risk conventional loans can offer lenders because of larger down payment requirements. A rate and term conventional refinance is presently limited to a maximum 97% loan-to-value, whereas a cash-out conventional refinance may not exceed an 80% loan-to-value ratio. Unless the homeowners have more than 20% equity in the property, the borrower is required to pay private mortgage insurance, which is an additional monthly cost added to the traditional mortgage payment.
- Mortgage Insurance
Any loans with loan-to-value ratios greater than 80% are subject by the lenders to carry a private mortgage insurance policy. Please see our Mortgage Insurance Options page for further details and choices on this topic. Private monthly mortgage insurance can be eliminated on a conventional loan. However, the process and requirements to cancel private mortgage insurance can vary between lenders.
- Credit Score
Presently, conventional guidelines are changing quite frequently. A minimum FICO score requirement for a competitive interest rate is higher than those required for an FHA loan. The borrower currently needs a minimum 640 credit score to qualify for a conventional loan and any credit score below a 740 is subject to the lender adding fees, which can be sizable, as in the several-percent range, as a borrower’s credit score drops compared to loan-to-value ratios.
- Interest Rate Pricing
On the contrary, borrowers with excellent credit scores over 740 and loan-to-value ratios under 80% are eligible for lower interest rate pricing and lender credits. These lender credits are used to lower the interest rates and/or as subsidies towards lowering the overall cost of the loan transaction. As the loan-to value ratio decreases (as low as 60% LTV), or inversely as the equity increases (up to 40%), the more favorable the interest rate pricing becomes.
- Adjustable-Rate Mortgage
Conventional loans incorporate either a fixed or adjustable interest rate program. Under standard market conditions, adjustable-rate mortgages (ARMs) usually result in a lower interest rate for the shorter fixed term of the loan. Once the initial fixed period has expired, the ARM’s interest rate fluctuates in relation to customary financial indexes, such as the COFI or LIBOR. The new variable rate allows the monthly mortgage payments to rise or fall according to the loan’s base rate, plus the index.
Conventional loans are ideal for borrowers with exceptional credit and who can meet the expense of a more sizable down payment.
Conventional Mortgage Highlights
- Ability to purchase a home with as little as a 3% down payment.
- Flexible mortgage insurance choices. Learn about mortgage insurance options.
- Fixed-rate and adjustable-rate program options.
- Avoid mortgage insurance all together with only 20% down and access the most competitive rates the wholesale market has to offer.
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Learn about alternative loan programs that may fit your goals.
- Purchase a primary home with as little as a 3.5% down payment.
- Qualify with less stringent qualification and credit requirements.
- Access to all fixed-rate and adjustable terms.
- Purchase your primary home with absolutely no down payment.
- No monthly mortgage insurance (PMI).
- Fixed-rate and adjustable-rate program options, including jumbo loans.
- Purchase a Fannie Mae-owned home with a down payment as low as 3%.
- No appraisal requirement.
- No private mortgage insurance (PMI).
- An opportunity to purchase a home up to $2,000,000.
- Purchase your primary home with as little as a 15% down payment with no mortgage insurance.
- Enjoy the ability to pay-down or payoff your mortgage at any time without a pre-payment penalty.
- Credit qualification flexibility as low as a 620 score.
- No down payment requirements.
- Designed for relief for low to moderate income qualifiers (check to see if this program is available in your area).
Why you should choose Starwest Mortgage for your home purchase:
- As a broker, Starwest gives you access to the most competitive rates, fees, and programs the wholesale lending industry has to offer. Why use a broker?
- No Closing Cost program
- Get loan status updates anytime, anywhere. Take advantage of our online tools.
In addition to mortgage options, learn your Home Purchase Responsibilities and information to keep you on track throughout your purchase transaction…