What is a Conventional Loan?
A conventional purchase loan is a mortgage loan that is not insured or guaranteed by the government. A conventional loan can be a conforming loan or a non-conforming loan. Conventional loans can be either fixed-rate loans or adjustable-rate loans. A conforming loan is a loan that meets the standards of loan guidelines established by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase loans from lenders and package them into securities for investors. The maximum loan amount for a conforming loan is $647,200 and $970,800 in higher-cost areas.
A non-conforming loan is one that does not adhere to Fannie Mae or Freddie Mac’s guidelines. These loans are more difficult to qualify for and have higher interest rates than conforming loans. A jumbo loan, which is a loan that exceeds the maximum loan limit for a specific area, is the most common type of non-conforming loan.
What are Conforming Loan Standards?
To be considered conforming and eligible for purchase by Fannie Mae and Freddie Mac, a mortgage must meet specific criteria that is favorable for investors to buy and sell. These standards are:
- Loan limit – $647,200 for a single-family home in most markets and $970,800 in higher-cost areas
- Credit score – At least 620
- Debt ratios – Ideally, a front-end ratio of 28 percent or less and a back-end ratio, also known as the debt-to-income (DTI) ratio, of 36 percent or less. (It’s possible to get a conforming loan with higher debt ratios, but lower is generally the better case for both borrower and lender.)
- Down payment/equity – Ideally, at least 20 percent down for a purchase or 20 percent equity for a refinance; however, Fannie and Freddie also back conventional loans with as little as 3 percent down
- Loan-to-value (LTV) ratio – Ideally, 80 percent or lower; again, Fannie and Freddie also back conventional loans with an LTV max of 95 percent to 97 percent, depending on whether it’s an adjustable- or fixed-rate mortgage, or if you’re a first-time homebuyer