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Conventional Loans

What is an Conventional Loans?

A conventional loan is not offered or secured by a government entity; however, they can be guaranteed by both Fannie Mae and Freddie Mac, two government-sponsored enterprises.

This loan could be your perfect fit if you have great credit and can afford a large down payment (although a large down payment is not always required — but can help you eliminate paying private mortgage insurance). Whatever your long- or short-term goals are, a conventional mortgage can help you meet them.

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Conventional Mortgage Topics Covered

What is a Conventional Loans?

A conventional Loans is one that’s not guaranteed or insured by the federal government. Instead, they are available through private lenders, such as banks, credit unions, and mortgage companies.

Conventional mortgages have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. This gives Texas homebuyers a sense of stability that is not present in the case of, say, an adjustable-rate mortgage. Interest rates for conventional loans tend to be lower than rates for FHA loans yet higher than those of VA loans.

Conforming conventional loans must fall within the limits set by Fannie Mae and Freddie Mac. If the loan surpasses that limit, it becomes a jumbo (nonconforming) loan.

Usually, you’ll be able to borrow more money on a conventional loan than on a FHA loan.

Potential Texas borrowers must complete an official mortgage application (and usually pay an application fee), then supply their lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.

Conventional Loans Requirements

Documentation Needed to Get a Conventional Loans

  • Proof of income and assets.
  • Employment verification.
  • A driver’s license/state ID card.
  • A valid social security number.

Other Requirements

  • Have a FICO credit score of at least 620 (this number may vary from lender to lender).
  • Make a down payment.
  • Have a debt-to-income (DTI) ratio of less than 50%. This means that your total monthly debt payments can’t be more than 50% of your pretax income (includes debts that you aren’t actively paying).
  • In the case of a conforming conventional loan, your loan must fall within the limits set by Fannie Mae and Freddie Mac.

Down Payment

The requirement for a down payment can vary based on your personal circumstances and the kind of loan or property you’re getting. First-time home buyers in Texas have the possibility of acquiring a conventional mortgage with a down payment as low as 3% through financial assistance programs.

  • If you’re not a first-time home buyer, the down payment requirement is 5%.
  • If you’re a second-time home buyer, the requirement is 10%.
  • With an adjustable rate mortgage, you need to put down at least 5%.
  • In the case of a jumbo loan, the down payment requirement ranges from 10% to 40%.
  • If you’re not buying a single-family home, you may need to put down 15%.
Private Mortgage Insurance

  • If you choose to make a down payment of less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI), which protects your lender in case you default on your loan. This is different from FHA loans, where you have to pay an upfront mortgage insurance premium (UFMIP) and an annual MIP.

    Your PMI is typically included as part of your monthly mortgage payment, but there are other ways to cover the cost as well. There’s the option to pay it as an upfront fee, or, alternatively, in the form of a slightly higher interest rate.

    When you reach 20% equity on your home, you can ask your lender to remove the PMI from your mortgage payments. Once you reach 22% equity, though, the PMI will automatically be removed.

Types of Conventional Loans
  • Conforming – meets loan standards set by Fannie Mae/Freddie Mac. For clarification: the FNMA (Fannie Mae) and the FHLMC (Freddie Mac) are home mortgage companies created by the U.S. Congress. They make the mortgage market more affordable and stable, and they provide liquidity to thousands of loans, banks, and mortgage companies in America.
  • Nonconforming – (like a jumbo loan, for example) doesn’t meet the loan standards set by Fannie Mae/Freddie Mac. Oftentimes, jumbo loans require a higher credit score than conforming ones do.
  • Fixed Rate – for as long as you have the mortgage, the interest rate will remain the same.
  • Adjustable Rate – (also referred to as hybrid ARMs) rates change annually, after staying fixed for a set amount of years.
  • Amortized – there is a set monthly payment from the beginning to the end of your loan repayment period, without a balloon payment (these can have either fixed or adjustable rates).
  • Low Down Payment – more flexible than other types; you can get a down payment as low as 3 or 5 percent.
  • Portfolio – the lender chooses to keep the loan in its own portfolio as opposed to selling it on the secondary market. These are good if you have a high DTI or a low credit score but are still able to afford something with a higher interest rate.
  • Renovation – allows you to finance a house while also paying for renovations (good if you’re buying a fixer-upper).
Conventional Loans Advantages
  • The interest rates tend to be lower.
  • There are more options in terms of down payment.
  • Overall, these loans can be very flexible as most of them don’t need to follow the guidelines set by government agencies.