Conventional Loans

A Conventional Loan is any loan that isn’t guaranteed or insured by the federal government. This means that it’s not considered FHA, VA or USDA.

Conventional loans come in two varieties: conforming and non-conforming. Essentially, a conforming conventional loan means that the loan meets all the underwriting guidelines set forth by Fannie Mae and Freddie Mac; the same guidelines used for FHA, VA and USDA. These loans are often sold to Fannie Mae or Freddie Mac, but they aren’t underwritten by a government agency. The loan amount for a conforming conventional loan must currently be less than $417,000 and the down payment must come from the borrower (not a gift).

Examples of non-conforming conventional loans are portfolio loans, which are owned by the lender and are not sold (in fact, they cannot be sold) to Fannie Mae or Freddie Mac.

Down payments for a conventional loan range from 5% to 20%, although you can put down more if you wish.

Your debt-to-income ratio is typically 28/36, meaning no more than 28% of your income can go towards paying your housing expenses, and no more than 36% of your income can go towards paying all of your recurring debt payments, including your housing payment, credit cards, car loans, etc.

Your FICO credit score needs to be at least 620 to qualify for a conventional loan, although your interest rate will be higher for lower credit scores. The best rates are reserved for borrowers with credit scores over 750 or at least 700.

If you’ve filed for bankruptcy, you have other requirements. For a Chapter 7, you’ll need to be clear of the bankruptcy for at least 4 years, and for a Chapter 13, you’ll need to wait at least 2 years. If your last home was sold as a short-sale, you’ll also have to wait 2 years to qualify for a conventional mortgage.

This type of loan may be right for you if you have good credit and a large down payment. You may pay a slightly higher interest rate than a typical FHA loan, but that will likely be offset by lower (or no) mortgage insurance premiums.