Conventional Loans | Requirements & Guidelines for 2022
Also known as conforming loans, conventional loans “conform” to a set of standards set by Fannie Mae and Freddie Mac. Conventional loans boast great rates, lower costs, and homebuying flexibility. So, it’s no surprise that it’s the loan option of choice for over 60% of all mortgage applicants.
- Can use to buy a primary residence, second home, or rental property
- Available in fixed rates, adjustable rates (ARMs) with loan terms from 10 to 30 years
- Down payments as low as 3%
- No monthly private mortgage insurance (PMI) with a down payment of at least 20%
- Lower mortgage insurance costs than FHA loans
- Mortgage insurance is cancelable when home equity reaches 20% (unlike with the federal government-backed FHA loans)
Conventional mortgage down payment
Keep in mind, that the more you put down, the lower your overall loan costs. Your down payment amount helps determine your PMI rate and interest rate, which affects your monthly payment amount and overall interest costs.
You may also use gift funds from a parent or eligible non-profit agency to pay for your entire down payment and loan closing costs. Learn more about gift funds here.
Conventional loans require as little as 3% down (this is even lower than FHA loans). For down payments lower than 20% though, private mortgage insurance (PMI) is required. (PMI can be removed after 20% equity is earned in the home.)
The Cost Affects of Your Down Payment Amount
*The scenarios are calculated based on a 30-year fixed rate loan at 4% interest for $200,000. **Assumes a 720-739 credit score. Source: CFPB.
Private mortgage insurance (PMI)
PMI is required any time you put less than 20% down on a conventional loan. Once you reach 20% equity in your home, it can be removed though, unlike FHA mortgage insurance which is required for the life of the loan, in most cases.
For those with good credit, private mortgage insurance on conventional loans can cost less than FHA mortgage insurance premiums. Why? PMI is risk-based insurance, like auto insurance, meaning the better your credit history, the lower your premiums. The lower your premiums, the lower your monthly mortgage payment. So you benefit if you have a clean history.
Each private mortgage insurance company has varying rates for different down payment and credit score scenarios. Make sure your lender shops around for the best PMI cost for you.
For an in-depth comparison of PMI and FHA mortgage insurance, see our post that compares FHA to the Conventional 97 loan.
Can a second mortgage eliminate PMI?
This loan structure uses a conventional loan as the first mortgage (80% of the purchase price), a simultaneous second mortgage (10% of the purchase price), and a 10% homebuyer down payment. The combination of both loans can help you avoid PMI, because the lender considers the second loan as part of your down payment. A piggyback loan can make homeownership accessible for those who may not yet have saved a down payment.
Conventional loan credit scores
In general, conventional loans are best suited for those with a credit score of 680 or higher. If you have a higher credit score, it’s possible that a conventional loan will offer the lowest mortgage rate. Applicants with lower scores may still qualify, but they can expect to pay higher interest rates.
Lower credit score buyers might benefit from a different type of mortgage, perhaps one back by a government agency. The associated costs ple, Fannie Mae and Freddie Mac impose Loan Level Price Adjustments (LLPA) to lenders who then pass those costs to the consumer. This fee costs more the lower your credit score.