A "Conventional" (conforming) mortgage is a loan that conforms to established guidelines for the size of the loan and your financial situation
The main difference between a Conventional loan is that it's not insured or guaranteed by the federal government. There is a very common misconception that Conventional loans require 20% down payment, but that can't be further away from the truth. Conventional loans offer the ability to put down as little as 3% of the purchase price (lower than FHA); making it very accessible for first-time home-buyers.
Conforming loans are the most common when talking Conventional. "Conforming" means that each loan is structured utilizing Fannie Mae or Freddie Mac guidelines. Interest rates are competitive and terms between 10 and 30 years are available. Unlike government-backed loan products such as FHA, Conventional loans tend to have higher rate adjustments which may not be the most suitable choice for borrowers with lower FICO scores or higher debt-to-income ratios. in a nutshell, rate adjustments make up how your interest rate is created. These adjustments can make your rate higher or lower depending on your situation. As of 11/10/22, the Federal Housing Financing Agency (FHFA) has removed all loan level rate adjustments or rate adjustments to the lame men for first-time homebuyers that have income at 100% of the properties area median income and 120% in high-cost areas such as Los Angeles and Orange County.
Common Conventional Requirements
Loan amount - The loan amount will need to meet the limits set forth by Fannie Mae or Freddie mac which were recently raised from $548,250 to $647,200 for a single-family home in San Bernardino and Riverside county. Limits may be higher in higher-priced regions such as Los Angeles, Orange and San Diego county. Jumbo loans allow you to exceed the conforming loan limit to borrow for a higher-valued home.
Down payment - Conventional offers a 3% down payment, but the most common being 5% and higher. For Borrowers with lower credit scores, recent credit events such as a foreclosure, short sale or bankruptcy government-backed mortgages like VA and FHA loans may be a better option. Our loan officers will advise you of the pros and cons for each option available. It's important to know that if the down payment is less than 20 percent on a conventional loan, private mortgage insurance (PMI) will be required. Our loan officers will also educate you on the premium amounts and other options that are available with PMI.
Credit history - Generally, conventional loans will offer the best terms when FICO scores are 720 or higher, but they can still be very competitive between 680 and 719. Homeready®and Homepossible® offer loan adjustment caps that greatly improve not only the interest rate but the PMI premium requirement.
Homeready® and HomePossible®
A very viable alternative to FHA exists with Homeready® and Homepossible®. Fannie Mae and Freddie Mac have created these programs for borrowers that may be credit challenged and/or have limited amount of funds available for the down payment and/or low income. Borrowers are able to get better pricing due to loan adjustments caps put on by Fannie and Freddie explained above. As of 11/10/22 all rate adjustments have been removed by the FHFA creating a more affordable option for borrowers.
Homeready® and Homepossible® do have income limit restrictions based the property's location. We use a search engine provided by Fannie Mae and Freddie Mac to look them up which can be accessed below. We have had great success with properties located in Rialto, San Bernardino, Fontana, Hemet, Ontario and surrounding areas due to the higher income limits set forth.