A conventional mortgage is a home loan that is not government insured or backed by any Federal, State or Local agency. Unlike, FHA, VA or USDA, the conventional loan is funded by independent banking institutions that typically bundle the mortgage with others and are resold on Wall Street.
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The conventional loan may not be guaranteed by the U.S. government, but the mortgages follow the rules and guidelines of companies like Fannie Mae or Freddie Mac. Most banks or mortgage lenders refer to conventional mortgages and conforming home loan, because they conform to Fannie and Freddie. The underwriting guidelines follow Fannie Mae and Freddie Mac and are considered lower risk mortgages for delinquencies and defaults.
The conventional loans are typically offered and advertised with low interest rates. The most popular fixed terms for the conventional loan programs are the 15 and 30-year fixed rate mortgages.
Down-Payment Requirements with Conventional Loans
Mortgage lenders require between 3 and 20% down-payments. In most cases, the borrower would be required to pay monthly mortgage insurance if they put down less than 20%.
Credit Standards for Conventional Loans
Banks, credit unions and lenders expect borrowers to have good credit if they want to be approved for a conventional mortgage. Most lenders are looking for credit scores between 680 and 800 to extend a pre-qualification to an applicant seeking a conventional loan priced competitively. Borrowers with scores between 620 and 679 will likely need to put more money down on home purchases.
Conventional Loan Limits
The maximum loan amount for a conventional home loan in 2018 is $453,100 for a single-family residence in most states. However some high cost states have higher loan limits on conforming mortgages. Please check with your mortgage lender for current conventional loan limits in your region.
Borrowers will be expected to be able to document their income with pay-stubs for the last month and W2’s for the previous two years if they are offered a salary from a traditional business. Of course, self-employed borrowers will be expected to provide bank statements, 1099’s and 1040 full tax returns.
Everything You Need to Know About Conforming Loans in 2018
Do you know the difference between conforming and non conforming loans? What about conventional? When you are looking at different home loans, it is easy to get confused.
A conventional loan is one that is not backed or guaranteed by a government agency, such as FHA. A conforming loan is a loan that has a certain set of characteristics in the loan. In the mortgage industry, mortgage loans are sold and repackaged for mortgage investors. The biggest of these includes government sponsored entities or GSEs, also known as Fannie Mae and Freddie Mac. When a group of loans sticks to the Fannie and Freddie standards, it is called a conforming loan. When the loans fall outside those standards, they are non conforming loans.
For the loan to be conforming, it has to follow standards that let Fannie and Freddie to buy the loan. The most important factor is the limit on the loan. This is the maximum amount of the loan that the two agencies will buy. The limit may change from year to year. The limit for conforming loans according to the Federal Housing Finance Agency for most areas of the country is now $453,100. Some areas of the country such as parts of California and Hawaii, have higher loan limits because houses are much more expensive there.
The major advantage of getting a conforming loan with good credit is that you get a low interest rate, meaning lower mortgage payments and less money paid out over the term of the loan.
On the other hand, a non-conforming loan is a loan that Fannie Mae and Freddie Mac will not purchase. These are usually jumbo loans that are above conforming loan limits and have different underwriting standards. Non-conforming loans are riskier for lenders and thus are less common than conforming loans. But, if you want to buy a more expensive property with a mortgage, a non conforming, jumbo loan may be your only choice.
A jumbo loan simply means any loan that is above the current conforming limit. As noted, in most US counties the limit is $453,100. But in areas with higher prices, the conforming limit is much higher – $679,500. Jumbo loans are usually for people with higher income and good credit with a lot of cash in the bank. Because of the size of the loan and the fact the loan is not backed by the US government, lenders have a higher level of risk with these loans.
That is why borrowers often must put down at least 20% for these loans, and may need six to 12 months of mortgage payments in an account as security. This risk to the lender is offset with a higher interest rate, higher fees, and tougher underwriting.
There are other types of non conforming loans that are not just about the dollar amount. Non conforming loans also are available for people with a lower credit score, too much debt in relation to income, and a down payment of less than 20%.
That said, a lower down payment does not always mean you are getting a non conforming loan. Fannie Mae features a 97% LTV program for the first time home buyer. You can get a conforming loan and only put down 3%. So, you can still get a very low interest rate even with only a 3% down payment. Fannie Mae also has a 5% down program if you owned a home before.
For people who cannot qualify for a conforming, conventional mortgage, you may want to consider an FHA loan. Backed by the Federal Housing Administration, FHA loans are a good fit for those who have lower credit scores and a recent foreclosure or bankruptcy. Down payments for these loans are as low as 3.5%, and you only need a 580 credit score in some cases to qualify.
The bottom line on conforming loans is these are usually the best bet for people who are buying homes for less than $453,100, and have good credit. If you are getting a more expensive home, consider a non conforming loan. And if you have poor credit, FHA financing is usually your best option.