What is a Conventional Loan?
A conventional loan, also known as a conforming loan, meets the criteria set by Fannie Mae and Freddie Mac. These loans are more common and are available by private investors such as mortgage companies, banks, and credit unions. The guidelines set forth by a government sponsor entity, Fannie Mae and Freddie Mac, require a minimum credit score, income requirement, and a 3% to 20% minimum down payment.
A conventional loan does not receive any government guarantee or insurance. Both FHA and VA programs require government backing. Mortgage insurance, in some cases, like FHA, may require it in a conventional loan. When this occurs the insurance, policy is available by a company in the private sector, not by the government.
Determining Conforming Loan Amounts
Federal Housing Finance Agency (FHFA) determines Washington State conforming loan amounts. In addition, the FHFA requires the Housing and Economic Recovery Act of 2008 (HERA) to monitor and track the average home prices in Washington state and throughout the U.S. These home values will adjust the baseline jumbo home loan limit to reflect changes in home values.
What this means is that if home prices increase considerably in certain state counties, FHFA has the authority to increase the conforming loan limits to keep up with increasing home values. Conforming loan limits are normally set at 115% of a middle-price home for each area. That percentage can exceed this level in higher-cost areas.
In most counties in Washington state, $484,350 is the current single-family home conforming loan limit. If you’re looking in counties where housing is more expensive such as King, Pierce, and Snohomish, the single-family home loan limit is currently $726,525. With a loan at $726,525, it will require a minimum of 5% or higher down payment.
Fixed Rate and Adjustable Rate Mortgage?
Depending on your financial situation, a conventional loan can be a fixed rate or have an adjustable rate.
Therefore, if you decide to get a 15 or 30-year fixed-rate mortgage, it will mean that your monthly mortgage payment will be the same for the life of your home loan. That being said, a fixed home loan can have a higher mortgage rate than a FHA loan. However, keep in mind that choosing a shorter-term conventional loan can often come with a lower interest rate.
If you choose to go with an adjustable-rate mortgage (ARM) loan, you may qualify for a lower interest rate during the first phase of your mortgage payments. Unfortunately, the biggest downside to having an ARM is that the mortgage rate can fluctuate in relation to market index; therefore, monthly payments can increase or decrease accordingly.
Your credit score, the size of the loan, the amount of your down payment, and the rate structure (fixed versus adjustable) will basically determine your mortgage interest rates.
In some cases, FHA borrowers may receive lower rates than conventional mortgage borrowers due to the government provided insurance. Lenders may be more willing to offer a better interest rate for an FHA loan vs. a conforming loan because an FHA loan requires mortgage insurance that will protect the lender if the borrower defaults.
Conventional Loan Guidelines
Conventional loans guidelines are clear and concise and generally have the most accelerated qualifying process. To qualify, a mortgage lender will require a good credit history with a minimum FICO score of 620 and a minimum of 3% or higher down payment requirement. To avoid paying private mortgage insurance, (PMI), you will need to put a minimum of 20% down.
Nonconforming Conventional Loan
When a conventional loan exceeds the loan limit, it is considered a nonconforming conventional loan (aka jumbo loan). This conventional loan is not purchased by Fannie Mae or Freddie Mac because it will not meet the loan requirements. Therefore, lenders and private institutions will fund these loans.
The lender may require anywhere from 10% to 20% down depending on the loan amount. Lenders may require you to have money in reserves covering your monthly mortgage payments anywhere from 6 to 30 months.
Are you ready to buy your dream home? Contact Svetlana to see if you qualify for a conforming loan today!