Buy a Home

Conventional Loan

The go-to mortgage for most buyers

If you’re preparing to buy a home, you’ll find out about what’s called a conventional loan. After all, this type of loan represents the most popular option among homebuyers.

Those who meet the requirements to qualify for conventional loans often obtain flexibile financing that makes owning a home more affordable.

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What Is a Conventional Loan?

You have numerous options when choosing the right loan for buying a home. Mortgage loans often differ depending on the requirements to qualify and the terms and conditions offered, such as the loan’s length, interest rate and minimum down payment.

Conventional mortgages are part of the standardized mortgage options established by two government-sponsored enterprises, Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation). “Fannie” and “Freddie” also define the criteria for borrowers, and those criteria provide the rationale for the requirements to qualify.

If you have a higher credit score, a conventional mortgage is a great choice for financing your home. Conventional mortgages include a range of options for the down payment, closing costs and monthly payments. (If you have a lower credit score, the requirements for a conventional mortgage may be higher.)

There are other common loan programs, such as those offered by the FHA (Federal Housing Administration) or USDA (U.S. Department of Agriculture). FHA and USDA loans are distinct from conventional mortgages in that they’re insured by the government, and they allow for more flexible rules to qualify. (However, loan terms and conditions may be more difficult to customize or individualize.)

Feature	Conventional Loan	FHA Loan	USDA Loan
Down Payment	Minimum: 3%	Minimum: 3.5%	None required
PMI	Required unless down payment greater than 20% (or 20% equity achieved)	Mandatory	Not required However, there is an up-front, one-time 1% guarantee fee and an annual fee of 0.35% of the loan balance.
Credit Score	Minimum: 620	Minimum: 580	Minimum: 580
DTI	At or below 50%	Flexible	At or below 50%
Distinctions	Offers multiple options for down payment, closing costs and monthly payments	Great option for first-time buyers, lower minimums for down payment, credit score	Designed for home purchase in rural areas, for lower to middle incomes, for tran-sition from renting to owning

How to Qualify for a Conventional Loan

If you’d like to discover if you qualify for a conventional loan, connect with us at Compass Mortgage! To help you understand the process and get started, we’ve outlined the steps and the documentation needed below.

First Steps toward Obtaining Your Conventional Loan

Homebuyers often start by . . .
- Requesting a quote for their interest rate
- Beginning an application with Compass Mortgage
- Working with Compass Mortgage to obtain a credit report and evaluate their financial situation
As you share information about your potential purchase, we will . . .
- Arrange for an appraisal of the home you wish to buy to determine its value
- Discuss your individual options, including the terms and conditions for which you qualify
- Specify the documents you need for underwriting to begin the loan on a solid foundation

We’re with you through each and every step . . . all the way to closing and finalizing your loan and purchase!

Conventional Loan Requirements

Common requirements include . . .

Credit score of 620 or higher (preferable; often results in better interest rate)
Documentation which confirms debt-to-income ratio (DTI) at or below 50%. (DTI measures the percentage of your income that you spend on debt repayment.)
Employment verification and history
Down payment of 3% or more (based on income, number of home purchases, other factors)
Private Mortgage Insurance (PMI) if down payment less than 20% or until your equity in the home is 20% or more

If you have any questions, we’re here to help!

Conventional Loan FAQs

Financing a home is an important investment. It’s OK to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.

What is the difference between a conventional loan and an FHA loan?

Conventional Loan
- Flexible financing options
- Stricter requirements to qualify
- Better options regarding PMI, term length and closing costs, plus lower interest rate
FHA Loan
- Flexible financing options
- Because insured by federal government, requirements to qualify less strict
- More affordable, especially if credit score is lower
- Less options than a conventional loan, but provides competitive interest rates and possibilities for lower down payment

How much do I need for a down payment?

Consider . . .
- How much you’ve been able to save for a down payment
- The value of the house you want to buy
- How the amount of the down payment affects your mortgage (especially the monthly payment)
Typical down payment for any conventional loan
- Ranges from 3% (first-time buyers) to 20%
- Down payment of 20% (or more) eliminates need for PMI (which carries a monthly premium)

Several factors are considered to determine the minimum down payment. (Talk with a Compass Mortgage loan officer to find out more.)

What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) required for conventional loans without down payment of 20% or more
Not required once 80% Loan-to-Value ratio (LTV) achieved. (LTV measures what is owed on the mortgage loan for a home and its real, market value.)
Protects the lender if you stop making payments on your mortgage loan
Paid for via monthly premium
FHA loans require PMI for longer duration, potentially over the entire length of the loan

What are loan limits?

Total amount of money (maximum) a loan applicant can borrow with a conventional loan
If the home you wish to buy exceeds (or falls below) the limit, you may need to seek other financing options
Loan limits align with other standards set for conventional loans, are set annually by Fannie Mae and Freddie Mac
Requirements vary from state to state, also in high-cost locations
Contact a Compass Mortgage loan officer to find out current limits

What closing costs will I need to pay?

At closing, you’ll need to account for various up-front costs and costs included in your ongoing monthly payment (all will be communicated to you as your loan is processed, prior to closing)
Closing costs include loan origination fees, appraisal cost, title insurance and some other miscellaneous charges, ranging from 2-4% of the loan total