Conventional Loans

Conventional loans make up the majority of loans that are made in this country, and typically come with the best terms available, particularly for highly qualified borrowers.

A conventional mortgage loan is not guaranteed or insured by the government. Government loans are FHA,VA and USDA.

Conventional loans have interest rates and pricing that are tiered by credit scores and down payments. You’ll find better terms on conventional loans with every 20 points that your credit score rises. Top tier depends on the loan program and down payment but is most commonly 740, but can be 760, 780 or 800. You’ll find better terms on conventional loans typically with every additional five percent down payment, with 20% down being the threshold for not having to pay for mortgage insurance. The best interest rates typically are found at 25% or more down.  Best terms may also be available if you’re eligible for First Home Advantage or Home Possible/Home Ready.

There are three categories of conventional loans, conforming loans, conforming jumbo loans, and jumbo loans.

A conforming loan is the most common type of conventional loan, and these are loans that conform to the rules of Fannie Mae and Freddie Mac. Fannie and Freddie are government entities and they support the mortgage industry in a wide variety of ways including buying mortgages so we lenders can continuously lend.

Conforming loans have loan limits each year which are set based on average home prices. In 2024 in the DMV that loan limit is $766,550. Conforming loans can allow for as little as 3% or 5% down. In areas with higher housing costs such as here in the DMV, we also have a conforming jumbo loan product, which in 2024 has a loan limit of $1,149,825.  Conforming jumbo loans require 5% down and are priced higher than conforming loans. On conforming and conforming jumbo loans, the loan limits increase if the buyer is purchasing a 2-4 unit property.

Jumbo loans are loans not conforming to Fannie Mae and Freddie Mac’s rules, allow for higher loan amounts, currently up to 3 million.  Jumbo loans are available at conforming jumbo loan amounts and higher, and might provide better loan terms than conforming jumbo loans, but will have stricter underwriting.

Conventional loans have the most options that you may consider. You can find a fixed rate term as short as ten years, or as long as thirty years. You can find an adjustable rate, with a 30 year amortization, but with a start rate as low as three years and as long as ten years. This means that the initial interest rate will be set for 5, 7, or 10 years. The shorter term you request your rate to be set, the lower the starting interest rate. Be aware that in some instances you may need additional money down to acquire an adjustable rate loan.  Adjustable rate loans sometimes depending on the economy can be higher than fixed rate loans.

Conventional loans, when putting less than twenty percent down, will require some form of mortgage insurance. However a big advantage of conventional financing is that there is flexibility with mortgage insurance. There are a few options you can consider to best structure your loan so you save the maximum amount possible on mortgage insurance.
a) Monthly mortgage insurance – pay a monthly fee until you build 20-22% equity in the property.
b) Lender paid mortgage insurance – Increase the interest rate, by a lesser amount than monthly mortgage insurance. But, instead of the mortgage insurance disappearing after a certain number of years, this increase will be for the life of the loan. This is something that a borrower should consider if they plan to hold their loan for a shorter amount of time.
c) Upfront mortgage insurance – Typically the cheapest option provided the borrower has the funds to buy out the mortgage insurance in advance. Not a good option if the borrower plans to pay off the loan, or build equity to 20-22%, within three years.
More information on mortgage insurance: https://alexjaffe.com/mi