A conventional mortgage is a home loan that isn’t insured or guaranteed by the federal government. These loans are offered by private lenders, such as banks, credit unions, and mortgage companies.
One key feature of conventional mortgages is their fixed interest rate, meaning the rate remains constant throughout the loan term. This provides California homebuyers with financial stability compared to adjustable-rate mortgages, where rates can fluctuate. Generally, interest rates for conventional loans are lower than FHA loan rates but higher than VA loan rates.
Conventional loans that meet the lending limits established by Fannie Mae and Freddie Mac are referred to as conforming loans. As of 2020, the limit is $510,400. Loans exceeding this amount are classified as jumbo loans (nonconforming loans).
In many cases, borrowers can qualify for higher loan amounts with a conventional loan compared to an FHA loan.
To apply for a conventional mortgage, California borrowers must complete an official mortgage application, often accompanied by an application fee. Applicants are also required to provide documentation that allows the lender to conduct a detailed review of their financial background, credit history, and current credit score.
To qualify for a conventional mortgage, you’ll need to provide the following:
The amount you need for a down payment depends on your circumstances, the type of loan, and the property you’re purchasing. Here’s an overview:
If your down payment on a conventional loan is less than 20%, you’ll be required to pay for private mortgage insurance (PMI). This insurance protects the lender in case you fail to repay your loan. Unlike FHA loans, which require both an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP), PMI is typically paid differently.
PMI is most commonly included in your monthly mortgage payment, but there are other payment options available. You may choose to pay it as a one-time upfront fee or opt for a slightly higher interest rate to cover the cost.
The good news is that PMI doesn’t last forever. Once you build up 20% equity in your home, you can request your lender to cancel the PMI. If you don’t make a request, PMI will automatically be removed once your equity reaches 22%.
Conventional mortgages come in various forms, each tailored to suit different financial needs and circumstances. Here’s a breakdown:
These loans adhere to the lending standards set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). These government-created entities aim to promote affordability and stability in the mortgage market by providing liquidity to lenders, banks, and mortgage companies.
Nonconforming loans, such as jumbo loans, exceed the loan limits established by Fannie Mae and Freddie Mac. These loans typically require a higher credit score and may have stricter qualifying criteria compared to conforming loans.
A fixed-rate mortgage ensures your interest rate remains constant throughout the loan term, providing predictable monthly payments.
Also known as hybrid ARMs, these loans start with a fixed interest rate for a specific number of years, after which the rate adjusts annually based on market conditions.
Amortized loans have consistent monthly payments from the beginning to the end of the repayment term, without any balloon payments. These loans can have either fixed or adjustable interest rates.
Designed for borrowers seeking flexibility, these loans allow you to secure a mortgage with a down payment as low as 3% or 5%.
In this case, the lender retains the loan in its portfolio instead of selling it on the secondary market. These loans are ideal for borrowers with high debt-to-income (DTI) ratios or low credit scores but who can manage a higher interest rate.
Perfect for purchasing fixer-uppers, these loans let you finance the property while also covering the cost of renovations.
Lower Interest Rates
Conventional loans often come with more competitive interest rates compared to other loan types, especially if you have a strong credit history.
Flexible Down Payment Options
Borrowers have a variety of choices when it comes to down payments. Depending on the loan program and your qualifications, you can secure a home with as little as 3% down.
Greater Flexibility
Unlike government-backed loans, conventional loans don’t have to adhere to the strict rules set by federal agencies, offering borrowers more flexibility in terms of loan terms and conditions.
Conventional financing allows you to purchase a variety of property types, including single-family homes, condos, investment properties, townhomes, lofts, and vacation homes.
For primary residences, the seller can typically contribute up to 3% of the sales price toward your closing costs. If you make a down payment of more than 10%, the contribution limit increases to 6%. For investment properties, seller contributions are capped at 2%.
Raising your FICO score involves consistently paying bills on time, reducing outstanding credit card balances, and minimizing new credit inquiries. Building good credit habits over time will help improve your score.
On average, purchasing a home with conventional financing takes around 30 days. This timeline assumes you have all your documents ready, provide accurate information on your application, and respond promptly to any underwriting requests.
Conventional loans are ideal for borrowers with good credit and the ability to make the necessary down payment. However, since these loans involve stricter requirements, they may not be as accessible for first-time homebuyers. If you’re unable to qualify, a government-backed loan could be a better alternative.
Keep in mind that conventional loans can be more challenging to obtain due to the risk for lenders, but they also offer attractive benefits like competitive interest rates and flexible property options.
