Understanding the Key Differences Between Conventional Loan Programs

Conventional loans remain one of the most popular options for borrowers and brokers alike due to their flexibility, competitive interest rates, and ability to be customized based on the borrower’s financial situation. However, not all conventional loans are created equal. Depending on the borrower’s income, credit score, and property value, different conventional loan programs offer specific benefits that may make one a better fit than another.

In this article, we’ll take a closer look at six conventional loan programs that mortgage lenders have, breaking down their key differences to help borrowers and brokers better understand which one might be the right choice for their needs.

• Min. FICO: 620

• Max. CLTV: Up to 97%

• Loan Limits: Up to $802,650

• DTI (Debt-to-Income) Ratio: Up to 50%

• Down Payment: Minimum 3%

The Conventional Standard loan is a versatile option for borrowers who meet the minimum credit score requirements and are looking for competitive loan amounts. This loan can cover up to 97% of the property’s value, making it a solid choice for those with moderate down payment savings. With a flexible DTI ratio of up to 50%, borrowers with higher debt obligations can still qualify for this loan, as long as they meet the income and credit requirements.

• Min. FICO: 620

• Max. CLTV: Up to 97%

• Loan Limits: Up to $802,650

• DTI Ratio: Up to 50%

• Property Type: Primary residence only

The Fannie Mae HomeReady loan is designed for borrowers with limited down payment capabilities. Similar to the Conventional Standard loan, it offers a high CLTV ratio of up to 97%, making homeownership possible with just a small down payment. The main differentiator is that this program is aimed at borrowers purchasing a primary residence, and it’s particularly well-suited for low-to-moderate-income borrowers. The loan also allows income from other household members (such as a roommate) to be considered, which can help in qualifying for the loan.

• Min. FICO: 620

• Max. CLTV: Up to 97%

• Loan Limits: Up to $802,650

• DTI Ratio: Up to 50%

• Mortgage Insurance: Cancelable MI

Freddie Mac Home Possible is another option geared toward low-to-moderate-income borrowers. Like the HomeReady program, it offers a 97% CLTV and a DTI of up to 50%. What sets this program apart is the ability to cancel mortgage insurance (MI) once a borrower reaches 20% equity in the home. This can provide long-term savings by eliminating the need to pay mortgage insurance throughout the life of the loan. The Freddie Mac Home Possible program also has flexible underwriting criteria and income limits.

• Min. FICO: 620

• Max. CLTV: Up to 97%

• Loan Limits: Up to $1,203,975

• DTI Ratio: Up to 50%

• Property Types: Primary, secondary, investment homes

The Conventional High Balance loan is the ideal choice for borrowers looking to finance properties in higher-cost areas where home prices exceed standard loan limits. With a maximum loan amount of up to $1,203,975, this program allows for the purchase or refinancing of more expensive properties without having to resort to a jumbo loan. It’s available for primary residences, second homes, and investment properties, giving borrowers flexibility in their property choices. The program’s high loan limits and CLTV make it a great choice for those who need to secure a larger loan amount but don’t want to deal with the stricter requirements of a jumbo loan.

• Min. FICO: 620

• Max. CLTV: Up to 97%

• DTI Ratio: Up to 65%

• Property Type: Owner-occupied, 1-unit primary residence

• Documentation: Reduced

For borrowers looking to refinance, the Fannie Mae RefiNow program offers a simplified, streamlined option. Designed to lower interest rates and reduce monthly payments, this program allows for reduced documentation and higher DTI ratios—up to 65%. Borrowers can take advantage of this loan even with a higher debt load, and it’s intended for owner-occupied, single-unit properties. The simplified underwriting process makes it an excellent choice for borrowers looking for a quick, hassle-free refinance solution.

• Min. FICO: 620

• Max. CLTV: Up to 97%

• DTI Ratio: Up to 65%

• Property Type: Owner-occupied, 1-unit primary residence

Similar to the Fannie Mae RefiNow program, Freddie Mac Refi Possible provides a refinancing option for borrowers looking to reduce their mortgage payments. This program is especially appealing for borrowers who may not meet the stricter guidelines of traditional refinance programs. It allows for a higher DTI ratio—up to 65%—and offers the benefit of reduced documentation, simplifying the refinancing process. The program is available for owner-occupied primary residences, making it a practical choice for homeowners aiming to refinance with fewer hurdles.

With so many conventional loan options available, it can be challenging to know which one is the right fit. Here are a few tips to help you and your clients decide:

• For first-time buyers with limited down payment funds, programs like Fannie Mae HomeReady or Freddie Mac Home Possible offer excellent low-down-payment solutions with high loan-to-value ratios.

• For buyers in high-cost areas looking for more flexibility in loan amounts, the Conventional High Balance loan is likely the best fit, offering higher limits while maintaining the benefits of conventional loans.

• For refinancing homeowners, both Fannie Mae RefiNow and Freddie Mac Refi Possible offer streamlined options with reduced documentation requirements, especially for borrowers with higher debt ratios.

• For investment property buyers or those purchasing second homes, the Conventional High Balance loan also provides flexibility in terms of property types and usage. 

Whether you’re looking to purchase a new home, refinance an existing mortgage, or invest in a high-balance property, conventional loans offer a wide range of options to meet different financial needs. By understanding the key differences between each of the six programs, brokers and borrowers can make more informed decisions and select the loan that best suits their financial goals.

If you or your clients are ready to explore your conventional loan options, A&D Mortgage has a wide array of loan products tailored to different borrower profiles.