It’s no surprise that first-time home buyers often have the most questions about the financing part of the home buying process, which usually includes the different types of mortgages. FHA, VA and USDA are some types of mortgages you may have heard of, but today we’re going to look at one of the most common types of mortgages for home buyers, the conventional mortgage, which is also known as a conventional loan.
What is Considered a Conventional Mortgage?
A conventional mortgage is a loan that is not included in a specific government program, and may be offered by banks, credit unions, mortgage brokers or online lenders.1 Conventional loan terms and rates can vary significantly among lenders because they don’t have to stick to strict guidelines like a government program loan requires. It’s important to consider your options and make sure you understand the terms that are being offered.
Conforming and Non-conforming are the two main categories of conventional loans. Conforming loans have limits on the maximum loan amounts that are set by the government while other rules for these types of loans are set by Fannie Mae or Freddie Mac. As far as Non-conforming loans go, eligibility, pricing and features depend on the lender, so it’s typically best to consider numerous lenders before making a final decision.2
You can learn more about Conforming and Non-conforming loans from the Consumer Financial Protection Bureau, as well as other home financing terms. Remember, the choice of lender is always up to you.
Conventional Mortgage Requirements
One of the requirements of a conventional loan is a down payment, which can now be as low as 5%.3 If your down payment is less than 20%, there is a good chance that your lender will require you to have Private Mortgage Insurance (PMI). PMI is a risk-based insurance, so the premiums depend on your credit and the amount of your down payment.4
Here are some documents that you may need when applying for a conventional mortgage loan: 5
- 30 days of pay stubs
- 2 years of federal tax returns if self-employed or have rental properties or non-salary income (retirement, pension, etc.)
- 60 days of bank statements, all pages
- 2 years of W-2 statements
- Social security, retirement, and/or pension award letters and 2 years’ 1099s
- Proof of your identity (typically a drivers’ license or non-driver ID)
- Social security number
Advantages of a Conventional Mortgage
Conventional mortgages offer many advantages to home buyers, making it the preferred loan option for about 60% of mortgage borrowers.6 Conventional loans typically cost less over the life of the loan than FHA loans, but can be more difficult to get partly because they often have higher credit score requirements. Conventional loan financing may also not be available for manufactured homes unless land is also included.
A conventional mortgage can be intriguing to some home buyers, however it’s important to understand that there are multiple loan options and that not all home loans are the same. Some home loan options include conventional, FHA or special programs (i.e. VA, USDA).
As a first-time home buyer OR an experienced home buyer, there’s a lot of information that you need to gather. So, it’s important to do your research, compare loan options, and make sure that you have a good grasp on any financing lingo you may run into.
1 “How to Get a Mortgage.” Fay, Billy. Debt.org. Accessed July 5, 2018. https://www.debt.org/real-estate/mortgages/
2 “Conventional loans.” Consumer Financial Protection Bureau. Accessed July 5, 2018. https://www.consumerfinance.gov/owning-a-home/loan-options/conventional-loans/
3 Looking For The Best Mortgage. PDF. U.S. Department of Housing and Urban Development.
4 "What Is Mortgage Insurance and How Does It Work?" Consumer Financial Protection Bureau. September 25, 2017. Accessed July 16, 2018. https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/
5 "Create a Loan Application Packet." Consumer Financial Protection Bureau. Accessed July 16, 2018. https://www.consumerfinance.gov/owning-a-home/prepare/create-a-loan-application-packet/.
6 "Home Mortgage Disclosure Act." Consumer Financial Protection Bureau. Accessed July 16, 2018. https://www.consumerfinance.gov/data-research/hmda/.