What is a Conventional Mortgage?

A conventional mortgage is a home loan backed by Fannie Mae or Freddie Mac, the two government agencies that make up the Federal Housing Finance Agency (FHFA).

What Do Fannie Mae & Freddie Mac Do In The Mortgage Market?

A Longer Definition: Conventional Mortgage

Conventional mortgages, broadly, are mortgages backed by government agencies Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are the two mortgage entities that make up the Federal Housing Finance Agency.

Conventional mortgages are split into two categories: Conforming and Non-Conforming.

A conforming mortgage is a conventional mortgage that conforms to the FHFA’s published mortgage guidelines and falls within conformingmortgage loan limits for the area. After a conforming mortgage is originated for a home buyer, the mortgage is routed through Fannie Mae or Freddie Mac and then purchased on Wall Street as mortgage-backed securities.

A non-conforming mortgage is a conventional mortgage that exceeds loan mortgage loan limits and, therefore, cannot be purchased by the FHFA. Non-conforming mortgages are commonly called jumbo mortgages.

The FHFA modifies conforming mortgage loan limits annually to match changes in its House Price Index, a home-value tracker that measures home prices in more than 3,100 local markets.

The current conforming loan limit for single-family homes, including detached homes, townhomes, and condos, is $766,550 and ranges up to in high-cost areas of the country.

3,442,038 people used conventional mortgages to buy a home last year. Other conventional mortgage statistics include:

• The conventional mortgage market share was 69.70%
• The average conventional loan size was $402,642
• 98.6% of home buyers using a conventional mortgage purchased a 1-unit home

Conventional mortgages are commonly available with 30-year, 20-year, 15-year, and 10-year fixed-rate options and adjustable-rate options, including 3-year, 5-year- and 7-year ARMs.

Who Qualifies for a Conventional Mortgage?

To qualify for a conventional mortgage, first-time home buyers must meet Fannie Mae’s or Freddie Mac’s eligibility standards, which are nearly identical for buyers of 1-unit homes including detached houses, condominiums, townhomes, and row homes.

• Home buyers must make a down payment of at least 3 percent
• Home buyers must have a verified source of income
• Home buyers must have a minimum credit score of 620
• Home buyers may not have a recent foreclosure, short sale, or bankruptcy
• The mortgage loan size must be within local mortgage loan limits
• Homes must be structurally sound and habitable

In rare scenarios, a home buyer will be approved for a conventional mortgage despite not meeting official mortgage standards.

Conventional mortgages require home buyers to have a social security number or valid Individual Taxpayer Identification Number (ITIN). Permanent and non-permanent resident aliens are eligible for conventional mortgages at the same terms as U.S. citizens.

Conventional mortgages are the most widely used mortgage program nationwide. More home buyers use conventional mortgages than all other mortgage types combined.

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Chart: Conventional Mortgage Rates Since 2000

Homebuyer.com uses the FRED® API but is not endorsed or certified by the Federal Reserve Bank of St. Louis.
Data: Optimal Blue. Do not reprint without permission.

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Popular Conventional Mortgage Programs

Standard Conventional Mortgage: Best for Home Buyers With 5% Down Or More

The standard conventional mortgage is the no-frills mortgage loan most home buyers use. It’s the default mortgage option for home buyers who cannot use a VA mortgage because they never served in the military or a USDA mortgage because they’re not buying in an area on the USDA map.

The most common conventional mortgage is the 30-year fixed-rate mortgage. The typical first-time home buyer makes a downpayment less than twenty percent.

HomeReady: Best for Low-To-Moderate Income Home Buyers

HomeReady is a Fannie Mae affordable homeownership program for low-to-moderate-income households. HomeReady lets first-time home buyers make a minimum 3 percent downpayment and gives them reduced private mortgage insurance premiums and discounted mortgage rates.

HomeReady is the de facto low-down-payment conventional mortgage loan. The minimum credit score required is 620.

Learn more about the Fannie Mae HomeReady mortgage.

Home Possible: Best for Home Buyers With Boarder Income

Home Possible is a Freddie Mac affordable mortgage program for low-to-moderate-income households.

Home Possible is similar to the Fannie Mae HomeReady product: it allows a 3 percent down payment and offers reduced private mortgage insurance and discounted mortgage rates. However, the Freddie Mac version allows boarder income for qualifying purposes and enforces a minimum 660 credit score.

Learn more about the Freddie Mac Home Possible mortgage.

Conventional 97: Best for Home Buyers Making A Minimum Downpayment

The Conventional 97 mortgage, also known as the 97% LTV Standard, is the generic low-downpayment conventional mortgage.

Conventional 97 is available to first-time home buyers who purchase and plan to occupy their one-unit homes, including houses, condominiums, and townhomes, and who attend a homeownership education class.

Learn more about the Conventional 97 mortgage.

HomeStyle Renovation: Best for Home Buyers Making Major Repairs

The Fannie Mae Homestyle Mortgage is a mortgage that lets home buyers purchase a home and add the cost of repairs, improvements, or renovations to the loan’s beginning principal balance. HomeStyle mortgage rates are typically higher than other conventional mortgage rates.

Private Mortgage Insurance (PMI) for Conventional Mortgages

Private mortgage insurance (PMI) is to conventional mortgages what FHA mortgage insurance is to FHA mortgages: it’s an insurance policy that pays mortgage lenders when a homeowner has a mortgage default from not making payments.

It’s customary for mortgage lenders to order private mortgage insurance on behalf of a home buyer. Policies are mostly identical in price and coverage, which is based on traits including down payment size, credit score, size of down payment, and mortgage program.

The typical private mortgage insurance fee is between 0.25 and 1.00 percent per year.

Private mortgage insurance rates are lower for home affordability mortgage programs like HomeReady and Home Possible than a standard conventional loan. Payments are also lower for fixed-rate mortgages compared to adjustable-rate mortgages.

Generally, a conventional mortgage requires private mortgage insurance until the homeowner’s equity reaches twenty percent. Therefore, for many first-time home buyers, PMI goes away quickly.

Most first-time buyers can cancel PMI in fewer than three years.

Here’s why: The value of a U.S. home goes up approximately 7 percent per year, and with every mortgage payment, a homeowner’s PITI reduces their mortgage balance. Therefore, a home buyer who starts with five percent down would need roughly 27 months to reach 80% loan-to-value.

It’s common for first-time home buyers to delay buying a home because they want to avoid paying private mortgage insurance. This is one of the 21 mistakes that first-time buyers make.

Common Questions About Conventional Mortgages

What are this year’s conforming mortgage loan limits?

The FHFA set this year’s conforming mortgage loan limits at $766,550 for 1-unit homes, ranging up to $1,149,825 in high-cost areas. Search mortgage loan limits for every USPS address at https://homebuyer.com/mortgage-loan-limits.

Can I still get a conventional mortgage if I don’t have a 20% down payment?

Yes, home buyers can use conventional mortgages with a down payment of less than twenty percent. Popular low-downpayment mortgages include HomeReady and Home Possible.

Can I get a conventional mortgage if my credit score is low?

Yes, conventional mortgages are available to home buyers with credit scores of 620 or higher. Home buyers with lower credit scores will generally be assigned higher mortgage rates. If your credit score is too low to get the mortgage rate you want, compare it to an FHA mortgage.

What happens if I need a loan larger than my local mortgage loan limit?

When a loan amount exceeds the FHFA’s local conforming limits, the loan becomes a non-conforming or jumbo loan, which may have different mortgage guidelines and interest rates.