Looking to buy a home? Let me count the ways! Primary residence, second home, rental property, condo, town home, low down payment, self employed, commission income, and the list goes on. A conventional loan offers solutions to each of these and more. Basically, conventional loans are loans which conform to Fannie Mae and Freddie Mac guidelines. Plus, they are not backed by a government program such as VA, FHA, or USDA.
Conventional Loan Limits
Conventional or conforming loans providing affordable financing for borrowers looking to borrow low amounts up to the county loan limits. Every year, the Federal Housing Finance Agency announces the conforming loan limits. The loan size limits are based on the real estate market’s housing prices. For 2018, the conventional limit increased dramatically to $453,100. Although, it doesn’t change every year. Prior to 2017, it had been 10 years since the last increase. So, it is heavily dependent on the health & pricing of the real estate market. Increasing the loan limits allows more buyers to use the advantages of a conventional loan. In many counties, there is a large loan gap where FHA limits stop and jumbo loan sizes start. Obviously, conventional loans fill that gap very well.
Keep in mind that the loan limits varies by county and these amounts are the baseline. In each state, there are higher priced counties with higher conventional loan limits.
Low Down Payment Conventional Loan Options
Contrary to belief, conventional loans offer low down payment home loans. Buyers may purchase a home with as little as 3% down payment. Fannie Mae offers a program called HomeReady and Freddie Mac’s version is called Home Possible. Both allow a low, 3% down payment plus lower than normal mortgage insurance. Additionally, the down payment may be a gift from a family member or other allowed source. So, don’t just think of FHA as the only low down payment mortgage source. There are some very good reasons to choose a conventional loan over FHA. Especially, for higher credit score borrowers.
Not all low down payment conventional loans are 3% down. Even buying a vacation or second home is possible with 10% down. Actually, conventional loans are the only option for buying a second home or investment property. FHA, VA, and USDA are solely for primary residences. Even buying a rental property, 20% down is available. That’s not low, but it is still good for investment property.
Who Pays Closing Costs on a Conventional Loan?
On a conventional purchase loan, the buyer is responsible for their closing costs. These include an appraisal, title work, closing, lender fees, credit report, first year of insurance, escrow set up, etc. Although, conventional loans do allow the seller to contribute towards the buyer’s closing costs up to certain limits.
The maximum seller paid closing costs depend on the down payment amount and type of occupancy.
Conventional Primary or Secondary Residence Seller Paid Costs Limits:
- <10% down = 3% of price
- 25.01% – 10% down = 6% of price
- 25% or more down = 9% of price
Investment Property Seller Paid Cost Limits:
- 2% of the price on all down payment levels
By using seller paid closing costs as part of a purchase strategy, it can reduce the out of pocket costs for a buyer at closing.
Buying a Condo with a Conventional Loan
Condominiums offer low maintenance living to owners, so many choose this over owning a standalone residence. Conventional loan guidelines recently made it easier to buy a condo. Normally, lenders not only require borrower approval, but also condo approval. Depending on the residency type, condo type, and down payment, the requirements differ. Some scenarios require a full condo review and others allow a limited review. Limited is usually much easier.
A qualifying primary residence condo may allow as low as a 3% down payment for a buyer. Second home or vacation condo programs allow as low as a 10% down payment. Finally rental condos allow as little as 20% down, but 25% down allows for a limited condo review.
Buying a Rental Property with a Conventional Loan
Whether buying a long term rental or vacation rental, a rental property could offer a big step towards financial security. Fortunately for investors, not everyone is a homeowner. Therefore, there is a healthy demand for rental properties. As mentioned above, conventional loans provide financing for rentals when other loans do not. Rental qualification benefits include using 75% of the property’s market rent and allow multiple borrowers. Read more about buying rentals here.
Conventional Loan Mortgage Insurance Strategies
Low down payment isn’t just for the government loans. Just like govie loans, conventional loans require mortgage insurance when exceeding 80% of the purchase price or appraised value. Unlike FHA, VA, and USDA, conventional offers choices for mortgage insurance. These choices include monthly, single premium, split premium, and lender paid PMI. Although, it is tough to compare mortgage loans like apples to apples, there are ways to compare.
Single premium PMI
Single premium PMI is paying the mortgage insurance all at once rather than adding a monthly amount into the mortgage payment. This PMI may be paid through buyer funds, seller paid costs, or sometimes financed on top of the loan. For this to be a viable choice, usually a higher credit score is needed. The primary advantage to paying mortgage insurance up-front is that the borrower’s mortgage payment is lower than paying monthly PMI. While considering single premium PMI, it is key to consider how long the borrower would keep the loan. A loan officer can provide a breakeven comparison between monthly and single for borrowers.
Monthly mortgage insurance is the most popular type used with conventional loans. There is not an up-front cost and monthly PMI continues until it meets the threshold of 78% of the original purchase price or appraised value, whichever is less. But, a borrower may request monthly PMI removal once the balance reaches 80% of the original price. Additionally, the ability to cancel at 80% of current appraised value is possible. To learn more about this, check out our article, “How to get rid of PMI on FHA, USDA, and conventional loans”.
Split Premium PMI
Split uses a combination of monthly and single premium. FHA loans, which use both an up-front funding fee and monthly mortgage insurance, is a good example of split PMI. Also, conventional loans offer this option. When split PMI combines both single and monthly, each of the amounts are lower than each stand alone option.
Lender Paid PMI
The last mortgage insurance option works best
Fannie Mae Homestyle Renovation Loan
Ever wonder how most buyers and homeowners complete these wonderful renovations on TV? We have asked. It is renovation loans. Of course, some have cash. But, for those that do not have the cash or don’t want to use their cash, the Fannie Mae Homestyle Renovation loan provides the financing to these dreams. Although, other renovation loans exist such as VA Renovation and FHA 203k, Homestyle is unique in several ways.
- Primary, secondary, and investment properties allowed
- Mortgage insurance is cancellable
- No funding fee & cheaper mortgage insurance than 203k if strong credit scores
- Complete teardown or rebuild allowed
- Larger loan sizes than 203k