Conventional loans account for approximately 60% of all mortgage applications. The overall eligibility guidelines for conventional loans are set by Fannie Mae and Freddie Mac. Loans that conform to those guidelines are also referred to as conforming loans. The Federal Housing Finance Agency (FHFA) publishes a list of the maximum loan limits that apply to all conventional mortgages that will be purchased by Fannie Mae or Freddie Mac. Loan limits are established for one-, two-, three- and four-unit properties. For most of the lower 48 states, the current maximum loan amount for a one-unit property is $424,100.
Certain areas of the country are significantly more expensive to live in than others. These areas are called High-Cost Areas, and the maximum loan amount for these areas is substantially higher than those in the rest of the country. In these High- Cost Areas, the current maximum loan amount for a one-unit property is $636,150. 1
Updated annually, the FHFA list of loan limits can be found here.
Conventional Loan Requirements
On a typical conventional loan, buyers make at least a 20% down payment, eliminating the need for mortgage insurance. Historically, those buyers who were unable to put down 20% were forced into a government-insured mortgage product (FHA, VA, or USDA). However, both Fannie Mae and Freddie Mac now have programs that allow creditworthy, low- to moderate-income borrowers to purchase and refinance a home. In addition to allowing down payments as low as 3%, Fannie Mae’s HomeReady and Freddie Mac’s HomePossible programs also provide expanded underwriting guidelines.
In simple terms, if you own a home and don't pay the mortgage, the lender's remedy is to foreclose on the home. In a foreclosure, the lender hopes to recover what is owed on the loan, plus the attorney's fees and court costs associated with the foreclosure process. If you don't have much equity in the property and it goes to foreclosure, the lender's risk of loss is higher (i.e., the proceeds from the sale of the property won't cover the lender's total costs).
To offset the risk of loss when there isn’t much equity, lenders require that borrowers purchase Mortgage Insurance.
Most property types are eligible for conventional financing, including:
- Single family (detached) homes
- Townhomes, including those within a Homeowner’s Association
- 2-, 3-, and 4-unit properties
- Most condomimuims
- Manufactured homes (availability will vary from lender to lender)
With very limited exceptions, government loans (FHA, VA, and USDA) cannot be used to purchase or refinance second home or investment properties. Conventional financing, on the other hand, can be used to purchase or refinance properties which will not be owner-occupied. Interest rates, down payment, and underwriting requirements for non-owner-occupied properties are higher, but provide excellent financing opportunities for those who have capitalized on the recent combination of low interest rates and relatively high home values.
Waiting Periods for Derogatory Credit
Each type of loan program (conventional, FHA, VA, etc.) has its own requirements regarding the length of time borrowers must wait following a significant derogatory credit event, such as a bankruptcy, foreclosure, or short sale. For conforming loans, borrowers must wait four years following discharge of a Chapter 7 bankruptcy, two years following discharge of a Chapter 13 bankruptcy (four years from dismissal), seven years following a foreclosure (four years if the foreclosure was included in a bankruptcy), and four years following a deed-in-lieu, short sale, or pre-foreclosure sale. With their more relaxed underwriting guidelines, government-insured loans generally have shorter waiting periods.
1 This limit is substantially higher again for properties located in Alaska, Guam, Hawaii, and the U.S. Virgin Islands.