A true Conventional Mortgage is a home loan secured by Fannie Mae or Freddie Mac. The loans are made by private lenders (banks, mortgage companies, etc.) but are securitized by Fannie or Freddie and sold as mortgage-backed securities which helps mitigate the lenders’ risk.
Conventional mortgages comprise about 75% of the mortgage applications nationwide.
There are a few reasons why Conventional mortgages are the most popular in the country:
Conventional Mortgage Series:
Other Helpful Resources:
Conventional Mortgages require a down payment ranging from 3-5% of the purchase price of the home. The 3% options are primarily for first-time home buyers or families with low-to-moderate income; read more about the first time buyer and 3% down qualifications.
It is a common misunderstanding though that you need 20% down to qualify for a Conventional Mortgage and that couldn’t be further from the truth. There are a few benefits to putting more money down though:
Take Note: gift funds may be used towards your down payment; however, Conventional Mortgages have the most stringent requirements when it comes to who can provide the gift. Eligible donors must be a relative as defined as a spouse, other dependent, or an individual who is a blood relative through marriage or adoption. The donor can also be a finance or domestic partner.
The process for getting a Conventional Mortgage is the same process to get any other mortgage. For a more in-depth look, review our series on the steps to buying a house and review our complete home-buyers guide.
To obtain a Conventional Mortgage, you will go through a few basic steps:
Step 1: Getting Pre-Approved
In order to get pre-approved, you must complete an application and then help the loan officer document the information in the application.
After the loan officer reviews the application and supporting documentation, they’ll issue a pre-approval. At that point you can begin searching for a home!
Step 2: Find a Home & Get Under Contract
Once you have an accepted offer to buy a house, the loan process begins. You’ll provide the loan officer with a copy of your contract, be asked to sign some disclosures and provide any documents required for initial underwriter review.
At the start of the process, the loan officer will order an appraisal, title work and submit all supporting documentation to the underwriter who will review the file compared to the Conventional mortgage guidelines.
After the initial review, the underwriter will likely ask for additional items and collect any further necessary documentation to make sure that the applicant, contract, home and loan parameters are all in accordance with the Conventional guides.
Step 3: Loan Approval & Closing
Once all conditions have been satisfied, the underwriter will approve the loan. This process takes about 20-25 days from the time you get under contract. Once loan approval has been reached, the lender will work with the title company to finalize a settlement statement and closing documents for the closing.
Once the settlement statement and closing documents are prepared the applicant will sign all the final documentation and the title company will transfer title and record any necessary documents with the county in which the home exists and then you can take possession of your new home!
The Conventional Mortgage program is available to US Citizens, Residents and certain Non-Residents.
Conventional mortgages do have some of the strictest credit score and debt-to-income ratio requirements, so it sometimes can be a challenge to qualify. Mortgage credit score requirements vary by program, so if your scores are lower there are still other programs available.
Conventional loans also have the longest waiting periods for serious past credit issues such as bankruptcies, foreclosures or short sales. The waiting period after a foreclosure is 7 years, which short sales and Chapter 7 bankruptcies have a 4-year waiting period.
Below is a basic comparison between the FHA Mortgage and a Conventional Mortgage.
|Minimum Credit Score||520||620|
|Minimum Down Payment||3.5%||3-5%|
|Eligiblity||Available for both first time and non-first-time home buyers||Available for both first time and non-first-time home buyers|
|Property Requirements||Must be primary residence. 1-4 unit, condo, manufactured or modular||Primary, Second or Investment. 1-4 Unit, Condo or Modular|
|Chapter 7 Bankruptcy||2 year wait||4 year wait|
|Foreclosure||3 year wait||7 year wait|
Conventional mortgage will allow financing on most types of homes as long as there are comparable properties that have recently sold similar to the home you’re buying.
List of eligible properties would include:
One of the greatest benefits of the Conventional mortgage is that Fannie and Freddie don’t have any real property requirements. Most government loans such as USDA, VA, or FHA, require the appraiser flag issues such as peeling paint on the exterior of the home, missing handrails, or older roofs. If something is flagged that means it will have to be repaired before the borrower can close on the home. Thankfully, with conventional mortgages you do not run into these types of problems.
The Conventional mortgage has a lot of pros and cons, but it is the top mortgage program in the country for a reason. If you have good to great credit (690 or higher) and a reasonable debt-to-income ratio, then it’s likely that a conventional mortgage will offer better overall loan terms compared to FHA.
Also, if you plan to purchase a 2nd home, investment property, or have 20% equity, then it will either be the only option available or the best mortgage program available.
If you however don’t have a large down payment and/or have a lower credit score (under 690), then other mortgage programs may be more advantageous.