Do Fannie Mae and Freddie Mac have your back? Find out if a conventional loan is right for you.
Purchasing a home is an exciting endeavor, but securing the right financing can be a challenge. Conventional loans offer fixed- and adjustable-rate terms secured by Fannie Mae and Freddie Mac.
Conforming loans have less stringent eligibility criteria but come with limited funding amounts, while jumbo loans of up to $3 million are available for borrowers with strong credit. Find out how it all works to help make your house-hunting experience seamless.
Lenders that offer conventional loans
What is a conventional mortgage loan?
A conventional mortgage loan is any conforming or nonconforming loan that isn’t secured by the federal government.
Available in both fixed- and adjustable-rate terms, conventional home loans are offered by private lenders like banks, mortgage companies and credit unions, and by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
What credit score do I need for a conventional loan?
You might qualify for a conventional loan with a credit score as low as 620, but requirements may vary depending on the lender you choose.
Generally speaking, the higher your credit score, the better your mortgage rate. The best rates are reserved for borrowers with FICO scores above 740.
What are the minimum down payment requirements for a conventional loan?
Conventional lenders typically require a down payment of at least 20%. So, for a $300,000 home, you’d need to be ready with a down payment of $60,000 — excluding closing costs and taxes.
However, you could qualify for a conventional loan with a down payment of under 20%. Some conventional lenders accept down payments as low as 3%, but you’ll likely be asked to carry private mortgage insurance (PMI) to secure the loan.
Conforming and nonconforming conventional loans — what are they?
- Conforming loans meet the funding criteria of Fannie Mae and Freddie Mac and falls below the Federal Housing Finance Agency’s (FHFA) annual dollar limit. In most states, this limit is set at $424,100, but it can be higher in high-demand metropolitan housing markets such as Alaska, Washington, DC, and California.
- Nonconforming or “jumbo” loans offer loan amounts higher than the FHFA limit. They help you access more money to purchase an expensive home. Most jumbo loans start at $424,101 and top out at $3 million.
Since nonconforming loans don’t adhere to Fannie Mae and Freddie Mac lending requirements, they’re riskier for lenders and have higher interest rates than conforming loans. To qualify, borrowers typically need a credit score of 700 or higher and should be prepared with a down payment of at least 20%.
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What do lenders look for when you apply for a conventional loan?
When determining your mortgage rate, lenders are interested in more than just your credit score. Here are a few other factors your lender consider:
- Debt-to-income ratio. Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes toward debt. To qualify for a conventional loan, you’ll need a DTI of no more than 43%.
- Verified income. Lenders want to ensure you have the funds to cover your down payment and closing costs. So expect to provide proof of income and assets with pay stubs, W2s, asset account statements and tax returns from the past two years.
- Derogatory credit. If you’ve ever filed for bankruptcy or foreclosure, your lender considers both the length of time and circumstances surrounding the the event. While this may affect the rate you’re offered, it won’t necessarily disqualify you from financing.
What other loan options do I have?
- FHA loan. FHA loans are backed by the Federal Housing Administration. Lenient lending criteria such as qualifying credit scores as low as 580 and low down payment options of just 3.5% make this program a popular option for first-time home buyers.
- VA loan. Backed by the US Department of Veterans Affairs, VA loans are designed for veterans, service members and qualifying family members. VA loans offer no-down-payment options, no prepayment penalties and no insurance premiums for qualifying members.
- USDA loan. The US Department of Agriculture mortgage program was designed for low to medium income borrowers looking to purchase a home in a rural area. There’s no down payment needed for USDA loans, but borrowers may need to invest in private mortgage insurance (PMI).
Bottom line
Conventional loans offer both fixed- and adjustable-rate terms to help you finance the purchase of your home. Conforming loans allow for down payments as low as 3%, loan amounts are limited by the Federal Housing Finance Agency.
For larger loan amounts, nonconforming jumbo loans typically offer funding of up to $3 million, but have stricter eligibility criteria and higher rates. Find out more about mortgages and if a conventional loan is for you.
