Conventional loans are the go-to financing for most home purchases and refinances, but the demand for conventional mortgages ebbs and flows based on housing market and economic changes. A conventional loan adheres to standards set be Fannie Mae and Freddie Mac -- government-sponsored enterprises. Although some eligibility guidelines apply across the board, lenders have the ability to create their own guidelines for conventional loans, which can make it harder to get financing.
Conventional Loans Have Greater Share of Market
You can get a conventional loan from a bank, mortgage broker, credit union or a mortgage company. Fannie and Freddie set guidelines and buy conventional loans from the originating lender, freeing up the lender's funds for new loans. Fannie and Freddie also sell the loans to other lenders and investors on the -secondary mortgage market which allows the GSEs to continue buying loans. The liquidity this arrangement allows is part of the reason conventional loans are widely used. Unlike government-backed loans such as Federal Housing Administration and Veterans Affairs loans, which cater to a specific type of borrower, conventional loans reach a broader clientele.
Loan Amounts Capped
Loan limits are set each year for conventional loans. As of 2015, the loan limit for a single-family home was $417,000 in most parts of the country and $625,500 for designated high-cost areas. Higher loan limits apply for properties with multiple units, with a maximum limit of $801,950 for a 4-unit property in most areas and $1,202,925 in high-cost areas. Conventional loans are available for 1- to 4-unit properties. Loans that exceed these limits are considered jumbo loans and can't be sold to Fannie and Freddie.
Down Payments for Conventional Financing
Conventional financing can also be used for a condominium, investment, secondary and vacation home, and home improvement loans. As of the time of publication, conventional loans were available to borrowers with at least a 3 percent down payment. You can also get a conventional loan with between 5 percent and 20 percent down. This translates into an maximum loan-to-value, or LTV, between 97 percent and 20 percent. LTV describes the percentage of a home's value that is financed. The max LTV allowed on a conventional loan is based on the lender, the loan program, transaction type -- purchase or refinance -- and the intended use for the property.
Private Mortgage Insurance Facts
Private mortgage insurance may apply if you have less than a 20 percent down payment or have an LTV of more than 80 percent on a refinance. PMI protects the lender if you default; the PMI provider reimburses the lender, making it more feasible for the lender to make a loan with a smaller down payment. As the borrower, you pay a monthly fee in addition to your mortgage payment to pay for PMI. PMI rates vary and some lenders allow you to pay for PMI at closing so you don't have to pay monthly, an arrangement know as lender paid PMI, or LPMI.