What is a Conventional Refinance?

A conventional, or conforming, loan refer to any mortgage that is not insured by the federal government. These types of mortgages follow the terms and conditions set by Fannie Mae and Freddie Mac. They are government sponsored institutions who are the largest purchasers of mortgages in the United States. These loans have more strict qualifying guidelines compared to government insured loans.

High credit scores are recommended for this program since it will directly impact your monthly mortgage payment. Your debt to income ratio is also carefully reviewed and needs to be below 50%. A common misconception about conventional mortgages is that a 20% down payment is required in order to qualify. The reality is conventional financing allows for 3% down payment when used in combination with monthly mortgage insurance.

Conventional Refinance Mortgage

Conventional Refinance Rates

Thanks to strong backing from two of the largest lending agencies Freddie Mac, and Fannie Mae, Conventional loans and mortgage rates are at an all-time low. Since the downturn of housing in 2008, these two entities have been in a conservatorship. In short, conventional loans have an implied government guarantee. 

Reduced Rates for These Loans

Nearly in the same class as FHA loans are conventional loans. Conventional loan backing isn’t nearly as explicit as loans with FHA, many have the argument that an implied guarantee is in keeping conventional rates low. Consumers are able to take advantage of ultra-low rates for their conventional refi while they have these rates available. 

Reasons to Use a Conventional Refi?

One of the most flexible products available on the market today is a conventional refi loan. Homeowners are utilizing this to accomplish a wide variety of their home finance goals. 

1. Conventional Refinance for Non-Owner Occupied Residences

This loan offers flexibility in that you can have non-owner-occupied residences. 

Government-backed loans such as the VA mortgage, USDA home loans, and FHA loans are only allowed for a primary residence in which the owner occupies the home. However, with a conventional refi loan, it can be used for a secondary home, an investment or rental, or for the primary residence. 

2. Cash-Out/Debt Consolidation Conventional Refinance

With a conventional cash-out loan, it’s easier to tap into your home equity. Example, if you still owe $200,000 on your home and your home is still worth twice that amount, you would be eligible to take a loan out for $300,000 and replace the former loan and receive cashback when you close. 

Proceeds can then be used for a variety of purposes including debt consolidation, home improvements, college financing, and other purposes. Conventional loans can greatly reduce the monthly payment when credit cards, auto loans, and other payments are paid off. Conventional refi’s can also be used to cash out a rental or secondary home. Property investors can use this excellent move to remove equity from properties that are in existence and buy additional properties. 

3. Canceling USDA or FHA Mortgage Insurance

A lot of first-time homebuyers elect government-backed mortgages to gain entry to their first home. 

For an excellent reason:

  • Government-sponsored programs allow for flexibility with lower credit scores, as well as the down payment. Unfortunately, they can come at a cost. 
  • FHA loans can also include mortgage insurance or MIP at $71/month per $100,000 that is borrowed. With a USDA home loan, there is also an average monthly fee of $29/month per $100,000 in the amount of the loan. 
  • While the fees are well worth the cost for homeownership, many owners don’t way to pay these fees for the rest of the loan if there is already enough equity in the home to allow for cancellation of these payments. 
  • Conventional refi exchanges for FHA or USDA loans can also eliminate monthly fees. With just 20% more equity, you can stop paying costly monthly mortgage insurance on conventional loans. 
  • In comparison to a few years ago, home values are way up. Many homeowners are beginning to realize that equity makes government-sponsored fees for loans unnecessary.

4. Refi Out of Any Kind of Loan

Many have streamlined refi kinds that require the use of specific loans for the programs. VA streamlines require that a VA loan is in place and the FHA streamline has a very similar requirement. FMERR refi’s require a Freddie Mac loan in existence. 

However, standard conventional refi’s can replace other types of loans, such as: 

  • FHA
  • USDA
  • VA
  • Sub-Prime
  • Alt-A
  • Option ARM
  • First and second mortgage combos
  • Stand-alone second mortgages

Additionally, tax liens, mechanic liens, and any judgments on the title for the home can be paid off using a conventional loan. There aren’t any restrictions on the current type of financing in order to use conventional refi’s. 

5. Reimburse Cash Home Purchases

Conventional refi’s can be used to reimburse payments made for homes in cash. 

“Delayed financing rule” allows quick purchases with cash which is frequently a requirement when purchasing a foreclosure home that is on the auction block and thus not depletes cash reserves. Before the inception of this rule, it was required that investors wait for six months to obtain their cash-out refi on just purchased homes.

This rule eliminates the waiting period if these requirements are met:

  • There must be documentation at the bank of the cash that is used to buy a home.
  • New loans may not exceed the original purchase price of the home.
  • Title searches must prove that there are no liens on the home. 
  • Buyers must prove that the sale did indeed occur and that there wasn’t a loan on the home. 
  • Final HUD-1 documentation is adequate proof. 

Conventional Refinance Loan Limits

Conventional loan limits are higher for refi’s in 2021. Standard loan limits are based upon the number of units in the home. The maximum number of these units is four. 

Conventional Loan Limits Are As Follow:

  • 1-Unit Home: $548,250
  • 2-Unit Home: $702,000
  • 3-Unit Home: $848,500
  • 4-Unit Home: $1,054,500

High-cost areas are allowed higher limits. For example, in California, a home in Los Angeles can be financed for $548,250 using a conventional mortgage while a 2-unit home in Alabama will be allowed a loan of up to $702,000. 

Find Out How Much Your Home is Worth!

Enter your address above and and check the esimated value of your home.

Conventional Streamline Refi’s

A lot of homeowners want to know if there’s a conventional streamline refi. Streamline refi’s are a very popular choice for FHA or VA loans. There is no appraisal requirement for these programs. Frequently, income, as well as asset documentation requirements, are waived. 

Technically, there aren’t any conventional streamline programs. However, thanks to the new regulations, a lot of conventional refi’s can be completed without an appraisal. You can save as much as $500 or more. Lenders may only require minimal income documentation for applicants who are strong.

For example, a nurse that’s been on her job for over two years may only have to call the employer to verify employment. Requirements for pay stubs, tax returns, and W-2s may be entirely waived. For many refi types, Freddie Mac or Fannie Mae are already the owners of the original loan.  Such agencies have streamlined the process so that homeowners will have more access to lower payments. 

Maximum loan-to-value can vary depending upon the purpose of the loan, kind of property, and whether or not the new loan is a fixed rate or an adjustable mortgage rate (ARM). Loan-to-value LTV maximum for conventional refi loans. For example, lenders will allow for a higher LTV for a primary residence over a non-owner-occupied property. A loan-to-value or LTV compares the loan amounts and the property value. Higher loan amounts compare to home value, result in higher LTV. 

TypeUnitsFixed RateARM
Primary Residence180% LTV75% LTV
2 to 475% LTV65% LTV
Second Residence175% LTV65% LTV
2 to 4n/an/a
Investment175% LTV65% LTV
2 to 470% LTV 60% LTV

The above-named maxims are for traditional conventional refi’s. However, the FMERR program as well as High-LTV refi options, have typically no LTV limitations. LTV allows for 110% or 150% and will still qualify.

You can read more about these options:

  • Fannie Mae High-LTV Refinance Option (HLRO)
  • Freddie Mac Enhanced Relief Refinance (FMERR)

Without such programs, loan-to-value ratios that are for conventional loans are quite generous. They allow homeowners of all kinds the ability to refi a great amount of their home value. 

Conventional refi credit score minimum

In a conventional refi, the credit score can be as low as 620 and even lower in some instances.

Those are the official Freddie Mac and Fannie Mae guidelines. A lot of lenders set higher minimum standards at around 640 credit scores. It’s worthy of note that conventional loan rates are based on risk factors unlike government-backed programs such as FHA. In the case of Fannie Mae, they publish the loan-level adjustments to price or the LLPAs. This can raise the rates for those applications that have a higher loan-to-value ratio if they have a lower credit score. 

For example, homeowners that have a 680 credit score and the loan-to-value is 80% are going to pay more at 1.75% of the amount of the loan in comparison to an applicant that has a 740 credit score and a 60% LTV. Such additional fees may be paid in cash or wrapped into the amount of the loan or it may be taken out at a higher rate. 

The 1.75% fee is readily translated to approximately one-quarter of the percent of the increase in the rate. This is why a lot of homeowners that have lower credit scores may wish to consider using an FHA refi or they may wish to put a strategy into place that will help to increase their credit score before they apply for their conventional refi. 

PMI or Private Mortgage Insurance for Conventional Refi’s

With a conventional mortgage, there isn’t any upfront funding fee or mortgage insurance premiums like in FHA, USDA, and VA loans. Additionally, no monthly mortgage insurance will be required if they have 20% or more in equity. 

However, homeowners can refi with a conventional loan if they don’t have the 20% in equity. In such cases, private mortgage insurance is required. Homeowners may wish to refi using a conventional even if they do have a PMI due, as conventional private mortgage insurance can be canceled whereas it can’t be canceled with an FHA or a USDA loan. Conventional PMI will drop off when homeowners hit an 80% loan-to-value. Thus, it’s possible to replace an FHA loan using a conventional loan and PMI. They can cancel the PMI in a few short years. 

For those with a higher credit score, a conventional PMI rate is very affordable. In many cases, it’s even less costly than FHA mortgage insurance. It can be a wise strategy to cancel an FHA mortgage insurance using a conventional loan. Check the eligibility on the PMI insurance with top lenders

Conventional Refinance Q & A

Here are a few of the more common questions that homeowners have regarding conventional mortgage refi’s. 

Is it better to use an FHA streamline, or should I consider a conventional refi instead?

It may be worth taking the time to see if there is enough equity for a conventional refi. Conventional loans will allow for the cancellation of the insurance. 

What is the difference between an FMERR High-LTV refi option, and a conventional refi?

With an FMERR loan and the High-LTV, there are sub-types of a conventional mortgage. This can reduce some of the lending rules for a standard loan like the loan-to-value limits. Typically, if there is less than 3% equity it’s wise to check the FMERR or the High-LTV refi eligibility option. Such loans don’t have to have mortgage insurance if you aren’t paying it currently. 

What do I do if my appraisal comes in low?

Many lenders have an appraisal rebuttal process. Unfortunately, these aren’t often successful. However, if it turns out that there isn’t enough equity, you can check the eligibility for FMERR or the HLRO. If you’re still not eligible, you may wish to consider going through with a refi. You can cancel conventional PMI if you’re saving money or improving your financial situation.

Is it possible to get a conventional ARM refi?

This is a very popular choice. If planning to pay off the mortgage, or sell the home or refi within five to seven years, this may be a good option. There are many built in safeguards. The loan’s upward rate of adjustment, if it goes up, isn’t typically more than one or two percent annually. 

Does every lender offer a conventional refi?

Most do, but not all. A conventional refi is by and far the more popular refi type. It’s safe to assume that almost every lender in your area will offer a conventional mortgage.

How can I get a conventional refi?

Start out by getting a written quote from three to four lenders all in the same day. This can help to determine the best offer for value. Proceed through the process of application and underwriting and determine which is the best deal.