Conventional loans, often referred to as conforming loans, are mortgage loans made by banks and mortgage lenders. These mortgages, which fall under conventional loan guidelines, are purchased by Fannie Mae and Freddie Mac.
Among the guidelines are maximum loan limits, down payment conditions, minimum credit score, credit report tradelines, monthly debt to income ratios and other underwriting guidelines.
The 2023 conforming loan limit is $726,200 in the U.S. However, some high costs counties in Colorado, have higher conforming limits such as the five counties within the Denver metro, Boulder, Aspen, Vail, Summit County, and others. Loan amounts that exceed the conforming limits are known as jumbo loans.
While conventional loan programs are not insured by the Federal Government like a VA or FHA loan, they do abide by the guidelines of Fannie Mae and Freddie Mac which are more strict compared to government-insured loans.
Conventional vs. FHA and VA
A buyer seeking a conventional mortgage is required to bring in a 5% down payment unless they qualify for the Conventional 97, which is just 3% down. HomeReady or HomePossible programs are very attractive alternatives to FHA financing for buyers with 700 and above credit scores, debt-to-income ratios below 43, and qualifying employment.
A conventional loan does not have an up-front mortgage insurance premium (MIP) like FHA & VA loans. The fee for MIP can range from 1 to 3.3% of the loan amount. Having said that, monthly private mortgage insurance is required on Conventional loans with less than 20% down payment.
Note: the 3 & 5% down payment programs only apply to borrowers intending to occupy it as a primary residence.
You are able to purchase a second home or investment property using a conventional loan but with a higher down payment. With FHA and VA, it can only be a primary residence.
So what is the best mortgage choice for you?
Well, this all depends on your credit scores, overall credit report, debt and income ratios, the amount you have for a down payment, employment history, rent or mortgage payment history, etc.