Traditional loans are popular among home buyers but have more than one face. Each type of traditional loan has its own cost and qualification requirements. Can you get a conventional loan with 5 down?
What is a conventional mortgage?
A conventional mortgage is one that is not guaranteed or insured by the federal government.
Most conventional mortgages are “compliant”, which simply means they meet the sales requirements of Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored companies that buy mortgages from lenders and sell them to investors. This frees up lender funds so that they can bring more qualified buyers to their homes.
Conventional mortgages may also be incompatible, which means they do not meet the guidelines of Fannie Mae or Freddie Mac. One type of non-compliant conventional mortgage is a jumbo loan, which is a mortgage that exceeds the applicable loan limits.
Since there are several different sets of guidelines that fall under the scope of “traditional loans”, there is no single set of requirements for borrowers. In general, however, conventional loans have stricter credit requirements than government-backed loans, such as FHA loans. In most cases, you need a credit rating of at least 620 and a debt-to-income ratio of 50% or less.
Advantages and disadvantages
Conventional Credit Benefits
- Loan amount up to USD 424.100 (USD 625,500 in high-cost areas)
- No initial PMI
- Most properties have been accepted
- Mortgage insurance drops when LTV reaches 78%
- Zero down payment with a 20% discount
- Cheaper PMI than FHA
- Conventional 97 loans require a 3% decline
Conventional Credit Defects
- Higher minimum creditworthiness ratings (620-640 rating required)
- The advance is higher than government loans
- Slightly higher rates than FHA
- It’s harder to qualify
- More stringent income guidelines
Advance payment (5% – 20% +)
Conventional loans require a higher down payment than government backed mortgages. Most lenders will require a 5% discount on a traditional loan. However, the advance can be 10% – 20% or even more for larger loan amounts.
Conventional mortgage with a 3% discount
Freddie Mac and Fannie Mae have created a new program to encourage home ownership and compete with FHA loans, called the conventional 97 program. A traditional 97 loan requires only 3% down payment, which is even lower than the 3.5% down payment required by FHA.