Conventional Mortgages

Conventional Loans Topics Covered

What is a Conventional Mortgage?

A conventional mortgage is a home loan that isn’t insured or guaranteed by the federal government. These loans are offered through private lenders like banks, credit unions, and mortgage companies.

Conventional mortgages typically come with a fixed interest rate, giving Texas homebuyers long-term stability compared to adjustable-rate options. Interest rates on conventional loans are generally lower than FHA rates but higher than VA rates.

Conforming conventional loans must meet the loan limits set by Fannie Mae and Freddie Mac. If the loan amount exceeds those limits, it becomes a jumbo, or nonconforming, loan. In many cases, borrowers can qualify for a higher loan amount with a conventional mortgage than with an FHA loan.

To get started, Texas borrowers must complete a mortgage application—often with an application fee—and provide the lender with documentation for a thorough review of their background, credit history, and credit score.

Conventional Mortgage Requirements

To qualify for a conventional mortgage, borrowers must provide documentation that verifies their income, assets, employment, and identity. This typically includes proof of income, proof of assets, employment verification, a driver’s license or state-issued ID, and a valid Social Security number.

Additional requirements may apply depending on the lender. Most borrowers will need a minimum FICO credit score of 620, though this can vary. A down payment is required, and borrowers must also maintain a debt-to-income ratio below 50%, meaning their total monthly debts cannot exceed half of their gross monthly income. For conforming conventional loans, the requested loan amount must fall within the limits set by Fannie Mae and Freddie Mac.

Down payment requirements can differ based on the borrower’s situation and the type of property being purchased. First-time homebuyers in Texas may qualify for a conventional mortgage with a down payment as low as 3% through certain assistance programs. Most non–first-time buyers typically need at least 5% down. Repeat buyers may need 10%, and adjustable-rate mortgages generally require a minimum of 5% down. Jumbo loans often require significantly more, with down payments ranging from 10% to 40%. For properties other than single-family homes, the required down payment may be closer to 15%.

Private Mortgage Insurance

If you make a down payment of less than 20% on a conventional loan, you will need to pay private mortgage insurance (PMI), which protects the lender in case of a loan default. This differs from FHA loans, which require both an upfront mortgage insurance premium (UFMIP) and an annual MIP.

PMI is usually added to your monthly mortgage payment, but there are other ways to cover the cost. You can choose to pay it as a one-time upfront fee or as part of a slightly higher interest rate.

Once you reach 20% equity in your home, you can request that your lender remove the PMI. PMI is automatically removed when your equity reaches 22%.

Different Types of Conventional Mortgages

Conforming Loans meet the loan standards set by Fannie Mae and Freddie Mac. For context, Fannie Mae (FNMA) and Freddie Mac (FHLMC) are government-sponsored enterprises created by the U.S. Congress. They help make the mortgage market more affordable and stable while providing liquidity to thousands of loans, banks, and mortgage companies across the country.

Nonconforming Loans, such as jumbo loans, do not meet the standards set by Fannie Mae and Freddie Mac. These loans often require higher credit scores than conforming loans.

Fixed-Rate Mortgages have an interest rate that stays the same for the life of the loan, providing predictable monthly payments.

Adjustable-Rate Mortgages (ARMs), also called hybrid ARMs, have rates that remain fixed for a set number of years and then adjust annually based on market conditions.

Amortized Loans have set monthly payments from the beginning to the end of the loan term, without a balloon payment. These can have either fixed or adjustable rates.

Low Down Payment Loans are more flexible than other types, allowing for a down payment as low as 3% or 5%.

Portfolio Loans are kept by the lender instead of being sold on the secondary market. These loans can be a good option if you have a high debt-to-income ratio or a lower credit score, though the interest rate may be higher.

Renovation Loans let you finance the purchase of a home while also covering the cost of renovations, making them ideal for fixer-uppers.

Advantages of a Conventional Mortgage

Interest rates on these loans are generally lower. They also offer more flexibility when it comes to down payment options. Overall, these loans can be very adaptable, as many do not need to follow the strict guidelines set by government agencies.

Frequently Asked Questions

What types of homes can I purchase with conventional financing?
Conventional loans allow you to buy a variety of properties, including single-family homes, condos, townhomes, lofts, investment properties, and second or vacation homes.

How much can the seller contribute toward my closing costs?
For a primary residence, the seller can typically contribute up to 3% of the sales price toward closing costs. If your down payment is over 10%, the seller may contribute up to 6%. For investment properties, seller-paid closing costs are capped at 2%.

How can I improve a low credit score?
Paying bills on time, reducing existing credit balances, and avoiding frequent new credit applications are effective ways to raise your FICO score.

How long does it take to purchase a home?
The typical timeline for a home purchase is around 30 days. This assumes you have all necessary documentation ready, provide accurate and verifiable information on your mortgage application, and respond promptly to additional requests from underwriting.

Keep in mind that conventional loans are often more closely scrutinized by lenders because they can be riskier to originate. As a result, they may be less popular among first-time homebuyers in Texas.

If your credit score is strong and you can make the required down payment, a conventional mortgage could be a good fit. If not, a government-insured loan, such as an FHA or VA loan, may be a better option.

1st Alliance Mortgage LLC - NMLS 1407 | 4438 State Highway 6 S, Ste. 201, College Station, TX 77845

Notice To Texas Loan Applicants: Consumers wishing to file a complaint against a mortgage banker, or a licensed mortgage banker residential mortgage loan originator, should complete and send a complaint form to the Texas Department of Savings and Mortgage Lending, 2601 North Lamar, Suite 201, Austin, TX 78705. Complaint forms and instructions may be obtained from the department’s website at www.sml.texas.gov

A toll-free consumer hotline is available at 1-877-276-5550. The department maintains a recovery fund to make payments of certain actual out of pocket damages sustained by borrowers caused by acts of licensed mortgage banker residential mortgage loan originators. A written application for reimbursement from the recovery fund must be filed with and investigated by the department prior to the payment of a claim. For more information about the recovery fund, please consult the department’s website at www.sml.texas.gov