Conventional Loan Requirements, Loan Limits & Down Payment Options
Are you looking for conventional loan requirements? The two traditional loan government-sponsored enterprises (GSE) are Fannie Mae and Freddie Mac. Understanding all conforming guidelines for mortgage professionals or real estate agents can often be confusing, but the processes is streamlined with an Automated Underwriting System (AUS). This article is going to break down:
- Confirming loan limits.
- Conventional loans without PMI
- The down payment for conventional loan.
- Conventional guidelines.
Selling Guide: Fannie Mae Single Family
Conventional loans requirements are organized in the Selling Guide: Fannie Mae Single Family. These guidelines are published for borrowers, mortgage professionals, real estate agents, and accessible to anyone who wants to stay current with mortgage guidelines. Luckily, you do not have to read the guidelines to determine if you are pre-approved for a mortgage.
Loan Originators cannot tell if you are pre-approved without going through the pre-approval process just by going over basic information. The process is streamlined through an Automated Underwriting System (AUS) for Fannie Mae called Desktop Underwriter (DU). This is an automated tool that helps determine risk assessment in the early stages of applying for a mortgage. Loan Originators and underwriters have access to this automated tool.
Freddie Mac Single Family Seller/Servicer Guide
Another option is to see if you qualify for a Freddie Mac loan, which all guidelines are published in the Freddie Mac Single-Family Seller/Servicer Guide. There can be advantages to looking into options for Freddie Mac mortgages. You can go over options and Freddie Mac may have advantages like more competitive loans without PMI, different down payment conventional loan options, and different conventional loan requirements.
Freddie Mac also has an automated tool that helps in the early stages of applying for a loan with risk assessment called Freddie Mac’s Loan Prospector (LP). When going through the pre-approval process, you can ask your Loan Originator what options you have for a conforming loan.
Lenders Do Not Always Follow Agency Guidelines
The minimum credit score for a conventional loan is 620 FICO credit score. Some lenders have a guideline on top of agency guidelines that can make it more difficult to qualify for a mortgage. The internal guideline that lenders go by is called a lender overlay. Common overlays for conventional loan requirements include:
- Requiring higher standards on credit.
- Debt-to-income caps.
- Longer waiting period for foreclosure and bankruptcy.
- Cash reserve requirements.
- Requiring a larger down payment conventional loan.
- And many others.
Down Payment Conventional Loan
The down payment for a conventional loan can vary based on the type of conventional loan a borrower applies for. There are even conforming loan grants that can help with the down payment and closing costs. Some conventional grants you may get pre-approved for:
- 2% grant that only requires 1% down payment.
- 5% Down payment assistance program that does more require a minimum down payment.
In some cases, borrowers would want to negotiate a seller credit depending on the closing costs.
Fannie Mae Options – Conforming Loan
The down payment options for a purchase depend on many factors. Some factors include, the number of units, credit reputation, capacity, and collateral. For a principal residence, the minimum down payment is:
- 3% for a 1 unit.
- 15% for a 2 unit.
- 25% for a 3 and 4 unit property.
Investment properties require: a minimum down payment of:
- 15% for 1 unit and 25% for 2 to 4 units.
For a 2 to 4 units primary residence, the minimum down payment is 25%, but there is a Freddie Mac option with a minimum down payment of 5% for 2 to 4 units.
Freddie Mac Options – Conventional Loan
For investment properties, the minimum down payment is:
- 15% for a 1 unit property and 25% for a 2 to 4 unit.
For a primary residence, the minimum down payment for:
- A 1 unit is 3%.
- 5% for a 2 to 4 unit if you are occupying one of the units.
The 5% down payment conventional loan comes with income restrictions.
If you are looking for other multi-unit options, FHA minimum down payment for 2 to 4 units is 3.5%. FHA requires that the borrower occupies one of the units as a primary residence and does not have income restrictions.
Conventional Loans Without PMI
Conventional loans without PMI are called mortgages with lender-paid mortgage insurance (LPMI). It is important to compare the overall interest rate associated with this loan, the disadvantages, and advantages for LMPI in comparison to borrower paid mortgage insurance.
Borrower Paid Mortgage Insurance
- Borrower pays for mortgage insurance.
- The borrower can lower their mortgage payment through cancellation of mortgage insurance.
Conventional Loans Without PMI (LPMI)
- A borrower cannot lower their mortgage payment through the cancellation of mortgage insurance.
- The coverage exists for the life of the loan.
Mortgage insurance is not required on a loan when purchasing a home with 20% down.
Conforming Loan Limits
The general conforming loan limits increased in 2022. The maximum loan amounts of 2022 are:
- $647,200 for a 1 unit.
- $828,700 for a 2 unit.
- $1,001,650 for a 3 unit.
- $1,244,850 for a 4 unit.
For most mortgage companies, where the conforming loan limit ends, the jumbo loan begins. To see high-cost conforming loan limits, use the high cost table to search by county or contact a Mortgage Loan Originator.