With the availability of government-supported low-down payment programs like the Federal Housing Administration and Department of Veterans Affairs mortgages, it might seem like the 20-percent-down mortgage is a thing of the past. It's still alive and well, and if you're a strong buyer that wants to get a great rate and a low payment, a conventional uninsured loan might be the best option.
A conventional uninsured loan is a standardized form of mortgage in which borrowers have solid credit history and can provide a downpayment of 20 percent or more.
Conventional Loan Programs
A conventional loan is a loan that isn't specifically underwritten or supported by a government program. FHA, VA and United States Department of Agriculture loans all aren't conventional, while a bank loan or one that gets sold on the secondary market is. The term is a bit misleading, though, since conventional mortgages end up getting sold to Fannie Mae or Freddie Mac. Fannie and Freddie are both government-sponsored entities that were created by Congress and maintain ties to the federal government. Nevertheless, their loans are still considered to be private conventional mortgages.
Conventional Loan Limits
Conventional loans are also capped as to how much you can borrow. The loan limits are set by the Federal Housing Finance Agency, which oversees both Fannie Mae and Freddie Mac. As of 2019, the loan limit in the contiguous United States and Puerto Rico was $484,350. Outlying states and territories like Hawaii, Alaska, Guam and the U.S. Virgin Islands enjoyed a higher $726,525 loan limit. Certain high-cost areas are also eligible for an expanded limit of $726,525.
Insurance Requirements For Some Borrowers
If you put less than 20 percent down on your home loan, your lender will require some form of insurance to protect it. When you have less than 20-percent equity, there's not a lot of cushion between what you owe and the home's value. If the home was to go into foreclosure, there's a real risk that the bank would get less than you owe when they sell it, especially after adding in legal costs, missed payments, and the cost of selling the property.
Private mortgage insurance, or, in the case of FHA mortgages, the mortgage insurance premium, pays the lender for any losses that it incurs on money it lends over 80 percent of the property's value. If you put 20 percent or more down, the lender doesn't need insurance to protect it and you end up with an uninsured loan.
Conventional, Uninsured and Low-Down
If you'd like to take out a conventional uninsured mortgage and don't have 20 percent to put down, a piggyback mortgage might be a good choice for you. Piggyback mortgages start with a conventional loan as a first mortgage. This gives you access to a broad selection of lenders and to a competitive interest rate market.
Next, you find a second mortgage lender for 10 percent of the purchase price. While the second mortgage will probably have a higher rate than the first mortgage, the interest will be tax-deductible and you'll be paying the balance down instead of just paying for insurance. Finally, you put 10 percent down instead of 20.
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- Consumer Financial Protection Bureau (CFPB). "Conventional Loans." Accessed Mar. 14, 2020.
- U.S. Bank. "Conventional Loans." Accessed Mar. 14, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Is a Conventional Loan?" Accessed Mar. 14, 2020.
- Federal Housing Finance Agency. "FHFA Announces Maximum Conforming Loan Limits for 2020." Accessed Mar. 14, 2020.
- U.S. Department of Housing and Urban Development. "Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year 2019," Page 10. Accessed Mar. 14, 2020.
- Consumer Financial Protection Bureau (CFPB). "Debt-to-Income Calculator." Accessed Mar. 14, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Are (Discount) Points and Lender Credits and How Do They Work?" Accessed Mar. 14, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.