Conventional Mortgage
A conventional mortgage is the most common mortgage program in California.
What Is A Conventional Mortgage?
A conventional mortgage is a type of home mortgage not insured by a federal government agency. There are two types of conventional mortgages, conforming (Fannie Mae and Freddie Mac loans) and non-conforming (Jumbo and Portfolio loans).
Conventional Mortgage Benefits
Low Rates: For people with good to excellent credit, conventional mortgages typically offer some of the lowest rates available.
Lower Cost: Compared to government-backed mortgages, conventional mortgages typically have a lower cost structure.
Limited Documentation: Some conventional mortgages only require one year of income documentation.
Low Down Payment: A conventional mortgage offers a low down payment option, allowing for as little as 3.00% down.
Get The Right Conventional Mortgage
At California Mortgage Finder, we believe in finding the right conventional mortgage for every client. We’re uniquely positioned to offer clients the best of both worlds: low internet rates and exceptional service. Our streamlined process and client focus deliver an unparalleled experience for homebuyers and homeowners.
Did you know that some conventional mortgage programs offer an appraisal waiver? This means no appraisal is needed, thus saving the client time and money. Not all loans qualify. Ask your loan officer for additional details.
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Conventional Mortgage Requirements
To qualify for a conventional mortgage, you must meet certain requirements. Here are the six requirements you typically must have to obtain a conventional mortgage.
Credit
The minimum credit score requirement for most conventional mortgage programs is a middle score of 620. However, if you’re credit score is below 680 you many want to look at another option like a FHA or VA mortgage. Usually the program is better suited for higher credit scores.
Income
You’ll want a Debt-To-Income ratio at or below 45% to meet the programs income requirements. Underwriting can increase to a 50% Debt-To-Income ratio in some circumstances. Income is based on documentation submitted (W2s and paystubs or tax returns) to underwriting.
Equity
You’ll need 3.00% down for a purchase transaction, or if it’s a refinance, at least 3.00% equity in the property. If you are doing a cash-out refinance, you must have at least 20% equity post-closing. Equity Requirements are adjusted depending on credit score and equity.
Appraisal
With a conventional mortgage, you might not have to do an appraisal. Specifically, the conforming options allow for an appraisal waiver. If one is granted, you won’t have to do an appraisal, and the transaction will close much faster.
Asset
Some conventional loans do liquid require asset reserves. Secenarios in which asset reserves might be needed include cash-out refinances, second home and rental property transactions. Credit score might play a role as well.
Documentation
Some conventional loans only require one year of income documentation, and others require two-years of income documentation. In addition, the standard mortgage transaction documentation is required for most transactions.
Two Types Of Conventional Mortgages
There are two types of conventional mortgages, conforming and non-conforming.
Conforming
A conforming mortgage conforms to the loan amounts and underwriting guidelines of Fannie Mae and Freddie Mac. The conforming loan limits are updated yearly.
Conforming mortgage loans require a 3% down payment (or a 97% loan-to-value ratio if it’s a refinance), more if you have a lower credit score. Debt-to-income (DTI) ratio requirements are typically 45% or lower; however, there are instances when a loan applicant may be approved with a DTI as high as 50%. All conforming mortgages must go through an Automated Underwriting System (AUS), which evaluates dozens of risk factors.
Desktop Underwriter is the AUS for Fannie Mae and Freddie Mac uses Loan Product Advisor.
The three main risk factors are credit history, the amount you’re borrowing compared to the home’s value, and your ability to repay the loan.
Non-Conforming
The two most common loan programs under the non-conforming category of conventional mortgages are jumbo and portfolio mortgage loans.
Jumbo
Another well-known conventional mortgage is the jumbo mortgage. This name refers to the loan amount, which is always higher than the conforming loan limit for a home. Typically, you will need at least a 20% down payment (or 10% down with a second mortgage) and a credit score of 700 or higher.
Income sources are scrutinized more than conforming mortgages, and you’ll need a lower debt-to-income ratio to qualify.
Portfolio
Portfolio mortgage loans are conventional loans typically underwritten to the standards of an individual lending institution. Under most circumstances, the lender plans to retain the servicing rights for the loan. Servicing rights mean that a lender facilitates the administrative requirements of the loans (i.e., sends out the monthly statements and required correspondence).
Conventional Mortgage FAQs
Is A Conforming Mortgage The Same Thing As A Conventional Mortgage?
A conforming home loan is a specific type of conventional loan that “conforms” to the underwriting guidelines and loan limit requirements of Fannie Mae and Freddie Mac.
Many types of conventional mortgages are not conforming. For example, a jumbo mortgage is not a conforming mortgage, but it is a conventional mortgage because it’s not government-backed (like an FHA or VA mortgage). Additional example includes the Bank Statement Mortgage loan program.
Do Conventional Mortgages Have Mortgage Insurance?
Yes, some do and it’s called Private Mortgage Insurance (PMI). If you put down less than 20% or if you have less than 20% equity, then you will have to pay PMI with your regular monthly mortgage payment.
Am I Required To Escrow (aka Impound) My Property Taxes And Insurance With My Mortgage Payment?
No, unless you have less than 20% down, or if it’s a refinance with less than 20% equity. If you do, then you will need to have escrows (aka impounds).
Is There a Pre-Payment Penalty?
Some conventional mortgages do have a pre-payment penalty, while others might not (like conforming mortgage loans never have a pre-payment penalty).