Conventional loans are a popular mortgage option that are not insured or guaranteed by the federal government. These loans are often preferred by homebuyers with a strong financial profile, including a solid credit history and consistent income. In competitive real estate markets like Denver, sellers tend to favor offers backed by conventional financing over government-backed loans such as FHA loans or VA loans.
Unlike FHA loans, which are backed by the Federal Housing Administration, conventional loans are underwritten according to guidelines set by Fannie Mae and Freddie Mac. This gives lenders more flexibility but also sets specific eligibility criteria for borrowers.
One of the main reasons buyers opt for conventional financing is the range of benefits these loans offer. These include the ability to avoid private mortgage insurance (PMI) with a 20% down payment, flexible loan terms, and access to both fixed and adjustable interest rate structures.
In a hot housing market, conventional loans are often seen as stronger offers by sellers, which can improve your chances of getting your offer accepted.
To qualify for a conventional loan, lenders typically require a minimum credit score of 620. However, a score of 680 or above is ideal for securing more favorable terms and lower interest rates. The stronger your credit profile, the better your loan pricing and approval odds.
Another important factor is your debt-to-income ratio, which helps lenders determine your ability to manage monthly payments. Most conventional loans require a DTI below 43%, although exceptions can be made based on other strong financial indicators.
Contrary to popular belief, you don’t need a 20% down payment to secure a conventional loan. First-time homebuyers may qualify for as little as 3% down through special programs. For example, Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs allow low down payment options for borrowers meeting income and property eligibility.
Some buyers can even combine a 1% down payment with a 2% grant to lower upfront costs further. These options make conventional financing more accessible than many people think.
Private mortgage insurance is typically required on conventional loans when your down payment is less than 20%. PMI protects the lender in case of default and is paid monthly as part of your mortgage bill.
The good news is that PMI can be removed once your home equity reaches 20%, and it automatically drops off at 22% equity. This makes PMI on conventional loans more flexible and potentially shorter-term than government-backed loan insurance.
Fannie Mae and Freddie Mac are government-sponsored entities that purchase and guarantee most of the conventional loans issued in the U.S. While their guidelines are similar, some differences exist in how they underwrite risk and manage credit scenarios.
Using a lender that submits your loan through both Fannie Mae and Freddie Mac automated systems can improve your approval odds. These systems – known as Automated Underwriting Systems (AUS) – evaluate credit, income, and asset data to determine loan eligibility.
Conventional loans also open the door to investment property real estate. For a single-unit investment property, buyers must put down at least 15%. For 2- to 4-unit properties, the minimum down payment is 25%. These loans are ideal for house hacking, where buyers live in one unit and rent out the others.
Recent updates allow for more lenient down payment requirements on multi-unit properties when purchased as a primary residence. For example, Fannie Mae now allows just 5% down on 2- to 4-unit properties, provided you live in one of the units for at least a year.
Closing costs are an essential part of every real estate transaction. These costs typically range between 2% and 5% of the purchase price and include expenses such as the appraisal, title insurance, and escrow fees.
It’s common for buyers to negotiate seller concessions to help cover some or all of their closing costs. Depending on your down payment amount, sellers may be able to contribute up to 9% of the purchase price toward your closing expenses. Be sure to discuss this with your lender and real estate agent when making an offer.
Getting pre-qualified is an essential first step in the homebuying journey. While pre-qualification provides an estimate of what you may afford, a pre-approval involves a more thorough review of your financial profile and gives you stronger buying power.
At Miranda Mortgage, we make the pre-qualification process fast, friendly, and pressure-free. Our experienced mortgage team works locally in Denver and across Colorado to guide you through every step.
Conventional loans come with a choice of interest rate structures. Fixed-rate mortgages provide the stability of the same interest rate and monthly payment over the life of the loan, making them a great option for long-term homeowners.
Adjustable-rate mortgages (ARMs), on the other hand, often offer a lower introductory rate that adjusts after a set period. These loans can make sense for buyers planning to sell or refinance within a few years.
Loan limits for conventional mortgages are set annually by the Federal Housing Finance Agency (FHFA). In most of the country, the baseline loan limit for a single-family home is $766,550 in 2024. High-cost areas like parts of Colorado may allow for even larger loans through high-balance limits.
If your loan amount exceeds the local limit, you may need to explore a jumbo loan. Your mortgage advisor can help you determine what loan type is best based on your budget and location.
Conventional loans offer flexibility and affordability that can make them an excellent choice for first-time homebuyers. Programs like HomeReady and Home Possible are designed to support entry-level buyers by offering lower down payments, reduced PMI, and competitive interest rates.
Many buyers are also eligible for grants or seller concessions that reduce the amount of money needed at closing. Be sure to explore all available options with your mortgage advisor.
Avoid these pitfalls when applying for a conventional loan:
Be informed and ask questions to ensure you’re choosing the right loan structure for your financial goals.
Ready to take the next step toward homeownership? Contact Miranda Mortgage in Denver for expert advice on qualifying for a conventional loan. Our local team is here to help you explore your options, understand your numbers, and make confident decisions.
Schedule a free consultation today by calling 303.520.1786 or emailing Naiely@BarrettFinancial.com.
Can I use gift funds for my down payment? Yes, gift funds from family members can be used for down payment and closing costs, provided they are properly documented.
Do I need perfect credit to qualify? Not at all. While a higher score improves your chances, conventional loans are available starting at a 620 credit score.
Can I buy a duplex or triplex? Yes, conventional loans allow for up to 4-unit properties. Down payment and income rules will vary based on the property type and occupancy.
How long does the process take? Most conventional loans close within 30 days. Being pre-approved ahead of time can speed things up.
What’s the difference between Fannie Mae and Freddie Mac? Both are government-sponsored entities that set guidelines for conventional loans. The differences between them are minor and mostly behind-the-scenes.
