When you get a mortgage that’s not backed by a government agency, you’re likely getting a conventional mortgage.
Private lenders, such as banks and credit unions, fund conventional mortgages. These loans are flexible in purpose, and you can use the proceeds to purchase either your primary or secondary residence. The amount you’re able to borrow follows income and down payment guidelines set by Fannie Mae and Freddie Mac and loan limits set by the Federal Housing Finance Administration (FHFA).
Qualification guidelines for conventional mortgages often require a higher credit score than government-backed loans. According to Experian, it’s possible to qualify for a conventional mortgage with a score as low as 620. Many lenders prefer borrowers with credit scores 660 or higher. If you have a higher credit score, especially one that’s 740 or higher, you’ll be rewarded with a lower mortgage rate when you choose a conventional mortgage.
In addition to credit score guidelines, conventional mortgages typically require a 20% down payment for the best rates. If you’re putting down less, you’ll likely have to pay private mortgage insurance (PMI) until you have 20% equity in your home. PMI is an insurance policy that protects the lender if you default on your loan.
Lenders charge PMI to protect themselves because borrowers putting down less than 20% have less “skin in the game” and stand to lose less if they default. PMI adds extra to your monthly mortgage payment, usually between 0.3 to 1.5% of your loan amount.
Conventional mortgages can be conforming or nonconforming. A nonconforming loan is known as a jumbo loan. We’ll talk about that type of loan in the next section.
Conforming Conventional Loans
Conforming conventional loans do just that—they conform to high-end lending limits set forth by Fannie Mae. For 2020, the conforming loan limit for a single-family home is $510,400 for most U.S. states and Puerto Rico.
There are, however, exceptions to the high-end limits if you live in areas designated as “high cost” by the FHFA. There are 19 states and the District of Columbia with high-cost regions. If you live in one of these areas, the high-end loan limit for a single-family home goes up to $765,600.
Pros of Conforming Conventional Mortgages
- Available from a wide variety of lenders, both local and online
- Can be used for primary or secondary residences
- Low down payment options (often from 0% to 3%)
Cons of Conforming Conventional Mortgages
- Stricter qualifications than government-backed loans
- Potential PMI requirements if you put down less than 20%
When a Conforming Conventional Mortgage Might be Best
- You’re putting 10% to 20% down
- You have a higher credit score (over 740)