Most simply stated, a conventional loan means a homebuyer’s mortgage is not backed or insured by a government agency such as the Federal Housing Administration (FHA) or Veterans Administration (VA). Buyers can use a conventional mortgage to purchase a one- to four-unit home, a condominium, modular or manufactured home as a primary, secondary or investment property.
A loan that conforms to conditions and terms of the government-sponsored enterprises Fannie Mae and Freddie Mac is called a “conventional loan.” The down payment of a conventional purchase loan is generally higher than that of a government-insured loan, such as an FHA loan, which is 3.5%. Conventional borrowers generally must pay between 5% to 20% percent of a home’s purchase price for a down payment. On a refinance a conventional loan can go up to the Loan to Value (LTV) of 95% with the addition of PMI or LPMI factors.
On a conventional loan we will consider a buyer’s debt-to-income ratio, which he determines by calculating the projected housing costs and actual recurring monthly expenses. A buyer’s home expenses–which include the monthly loan payment applied toward principal and interest, property taxes, mortgage and homeowners insurance as well as total of all monthly expenses, including housing, must not exceed 43% of the buyer’s income.
A FICO credit score of 640 and higher increases a borrower’s rate of approval and may reduce the loan’s interest rate.