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About Conventional Loans

A conventional mortgage or conventional loan is a home buyer’s loan that is not offered or secured by a government entity. It is available through or guaranteed by a private lender or the two government-sponsored enterprises—Fannie Mae and Freddie Mac.

Conventional mortgages typically have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan.

Conventional mortgages or loans are not guaranteed by the federal government and as a result, typically have stricter lending requirements by banks and creditors.

Types of Conventional Loan

Conforming Conventional Loan

n order to be considered a conforming conventional loan, the loan must meet the guidelines set by Fannie Mae and Freddie Mac. No, those aren’t your friendly neighborhood grandparents. Fannie Mae (short for the Federal National Mortgage Association) and Freddie Mac (short for the Federal Home Loan Mortgage Corporation) are government-sponsored enterprises that purchase mortgages from lenders.

Nonconforming Conventional Loan

What about conventional loans that exceed the loan limit? These are considered non-conforming conventional loans.

Simply put, a non-conforming conventional loan (also referred to as a jumbo loan) is a conventional loan not purchased by Fannie Mae or Freddie Mac because it doesn’t meet the loan amount requirements. Instead, non-conforming loans are funded by lenders or private institutions.

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Benefits of a Conventional Loan

Because conventional loans offer so much flexibility, there are still some decisions you have to make even after you choose this loan type. You’ll also have to consider how much you can put down, how long you want your loan term to be, and how much house you can afford.

Low interest rates

Fast loan processing

Diverse down payment options, starting as low as 3% of the home’s sale price

Various term lengths on a fixed-rate mortgage, ranging from 10 to 30 years

Conventional Loan - Eligibility

Potential borrowers need to complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.

Dowmpayment

A down payment of at least 20% of the home’s purchase price readily available. Lenders can and do accept less, but if they do, they often require that borrowers take out private mortgage insurance and pay its premiums monthly until they achieve at least 20% equity in the house.

Debt-to-Income

An acceptable debt-to-income ratio (DTI). This is the sum of your monthly debt payments, such as credit cards and loan payments, compared to your monthly income. Ideally, the debt-to-income ratio should be around 36% and no more than 43%. In other words, you should spend less than 36% of your monthly income on debt payments.

Credit Rating

A credit score is a numerical representation of a borrower’s ability to pay back a loan. Credit scores include a borrower’s credit history and the number of late payments. A credit score of at least 680 and, preferably, well over 700 can be required for approval. Also, the higher the score, the lower the interest rate on the loan, with the best terms being reserved for those over 740.

Frequently Ask Questions

If you have a question that deals with clients, customers or the public in general, there is bound to be a need for the FAQ page.

Generally speaking, those who are just starting out in life, those with a little more debt than normal, and those with a modest credit rating often have trouble qualifying for conventional loans. More specifically, these mortgages would be tough for those who have:

  • Suffered bankruptcy or foreclosure within the past seven years.
  • Credit scores below 650.
  • DTIs above 43%.
  • Less than 20% or even 10% of the home’s purchase price for a down payment.

In the years since the subprime mortgage meltdown in 2007, lenders have tightened the qualifications for loans—“no verification” and “no down payment” mortgages have gone with the wind, for example—but overall most of the basic requirements haven’t changed. Potential borrowers need to complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.

No property is ever 100% financed. In checking your assets and liabilities, a lender is looking to see not only if you can afford your monthly mortgage payments, which usually shouldn’t exceed 28% of your gross income.6 The lender is also looking to see if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage. Among the items required are:

    Proof of IncomeAssetsEmployment VerificationOther Documentation