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Patriot Mortgage Company, LLC

Conventional Loans

A conventional loan is any mortgage which is not guaranteed or insured by the federal government.    Conventional loans come in all shapes and sizes, and while some government-backed loans provide unique benefits to homebuyers, conventional loans remain the most common type of mortgage loan.   Some examples include:

  • Conforming Loans
  • Non-Conforming Loans
  • Jumbo Loans
  • Portfolio Loans

Conventional loans are broken down into two categories: conforming and nonconforming.  Conforming conventional loans adhere to the guidelines established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), the two government-backed mortgage companies that own many mortgages in the U.S.   

Non-Conforming conventional loans are for homes that cost more than the loan limits set by Fannie Mae or Freddie Mac.  These mortgages are just known as “Jumbo” loans.

Portfolio loans are also considered conventional loans.  They are issues by private mortgage lenders that set their own guidelines.  Since these lenders don’t sell the mortgages to investors, they can offer unique features that other lenders can’t. 

Conventional loans are good for those homebuyers who have good credit, stable employment history and some money for a down payment.

Here are some characteristics and benefits:

  • Credit Score – Most cases, you will need a credit score of at least 620 to qualify for a conventional loan.  Although some lenders will look for a 660 or higher. 
  • Down Payment – First-time home buyers may get a conventional mortgage with a down payment as low as 3%.  However, the down payment requirement can vary based on your personal situation and type of loan or property you are purchasing.
    • If you are not a first-time home buyer or making no more than 80% of the median income in your area, the down payment requirement is 5%.
    • If the house you are buying is not a single-family home (i.e., more than one unit), you may need to put 15% down.
    • If buying a second home, you will need to put at least 10% down.
    • If you do not put down 20% or more, the lender typically requires you to pay private mortgage insurance (PMI).
  • Private mortgage insurance (PMI) – PMI protects your mortgage investors in case you default on your loan. The cost for PMI varies based on your loan type, your credit score, and the size of your down payment.
  • It is usually paid as part of your monthly mortgage payment, but there are other ways to cover the cost as well.
    • Some buyers pay it as an upfront fee included in their closing costs.
    • Choosing how to pay for PMI is a matter of running the numbers to figure out which option is the cheapest for you.
  • PMI will not be part of your loan forever – essentially, you will not have to refinance to get rid of it.  
    • When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments.
    • If you reach 20% equity because of your home increasing in value, you can contact your lender for a new appraisal so they can use the new value to recalculate your PMI requirement.
    • Once you reach 22% equity in the home, your lender will automatically remove PMI from your loan.
  • Debt to Income Ratio (DTI) – Your debt-to-income ratio (DTI) is a percentage that represents how much of your monthly income goes to pay off debts.  You can calculate your DTI by adding up the minimum monthly payments on all your debts (i.e., auto loans, credit cards, installment loans, etc.) and dividing it by your gross monthly income.  For most conventional loans, your DTI must be 50% or below.
    • Interest Rate Terms – There are two most common types of rate terms which are fixed-rate and adjustable-rate, or ARM.
      • In a fixed-rate mortgage rate, the initial interest rate remains the same for the life of the loan.
      • In an adjustable-rate mortgage or ARM, the interest can fluctuate with the market following an initial fixed-rate period.
      • Your interest rate will largely depend on your credit score and overall credit history.
  • Loan Terms – A loan term is defined as the length of the loan, or the length of time it takes for a loan to be paid off completely when the borrower is making regularly scheduled payments.
    • There are multiple fixed-rate options with terms ranging from 10 to 30 years, but you are not limited to 15-and 30-year terms only.