A Guide To Conventional Mortgage Loans For Brokers And Lenders

What is a Conventional Loan, anyway? Is it one from FHA? VA? My bank?

While Conventional Loan Rates can be higher than those of government-backed mortgages, such as FHA loans or VA loans, Conventional Loan Requirements may have l fewer restrictions. Also, a Conventional Loan Credit Score may need to be higher, and a Conventional Loan Down Payment could be higher.

• FHA vs. Conventional Loan:
  • A Conventional Home Loan is a home buyer's loan not offered or guaranteed by an agency of state or federal government. It is available through or guaranteed by a private lender such as a bank, credit union, savings, and loan, or the two government-sponsored enterprises—Fannie Mae and Freddie Mac.
  • Potential borrowers must complete an official mortgage application; supply required documents such as proof of income, credit history, and current credit score.

Different Types Of Conventional Mortgage Loans

Now that we have illustrated the difference between Conventional Loans and government-back loans let's look at the different types of Conventional Loans.

Conforming conventional loans. A conventional loan that is at or is less than the maximum loan amount set by the Federal Housing Finance Agency and meets additional loan requirements set by Fannie Mae or Freddie Mac is termed a conforming loan. It might also be called a GSE loan since Fannie and Freddie are Government-Sponsored Enterprises.

Nonconforming Conventional Loans. Conversely, a conventional loan that exceeds FHFA loan limits or uses different underwriting standards than Fannie Mae or Freddie Mac it's called a Nonconforming Loan. Or a Jumbo Loan. You probably need a jumbo loan to finance more than $484,350.

Fixed-Rate Conventional Loans. Conforming or nonconforming, all mortgages will require repayment with interest. Usually, this is a 30-year or a 15-year term. With a Fixed-Rate Conventional Loan, the interest rate stays the same for the life of the mortgage.

Adjustable-Rate Conventional Loans. If your mortgage is not a fixed-rate loan, chances are it is an Adjustable-Rate Mortgage or ARM. Conventional loans with adjustable rates have rates that may go up or down over time. ARM rates usually adjust annually, after an initial fixed-rate period of three, five, seven, or ten years.

Low-Down-Payment Conventional Loans. In times past, a conventional loan required a 20% down payment. In order to meet this requirement, borrowers must finance 80% of the home's value. In today's market, that's usually an enormous sum of money. in response to the current higher prices, this requirement has been adjusted downward.

A Portfolio Loan. This is a mortgage where the lender originates and retains the loan instead of selling it on the secondary mortgage market. A portfolio loan stays in the lender's portfolio. Why does that matter? The lender gets to pick the standards for the loans –the credit score they'll approve and how much money they'll offer to the borrower, instead of adhering to Freddie Mac or Fannie May standards.

Subprime Conventional Loans. A subprime mortgage is a loan that may be offered to prospective borrowers with less than perfect credit records. The higher interest rates these loans carry are intended to compensate the lender for taking the inherently more significant risk in lending to those borrowers.

Amortized Conventional Loans. An amortized loan has scheduled payments that apply to the loan's principal and interest. Typically, these loans pay more of the interest at the beginning, then slowly pay a larger and larger amount of the principal.

Conventional Mortgage Loan Requirements and Guidelines

As we have noted, there is more than one type of Conventional Mortgage Loan. But generally speaking, with the exception of a subprime loan or a portfolio loan, the requirements are the same. Let's recap.

As we've discussed, Conventional Mortgages are not government-backed, like a USDA or FHA loan. But a loan must meet the lending rules set by Fannie Mae and Freddie Mac to qualify as a conventional mortgage. These rules require:

• A minimum credit score of about 640, depending on the loan amount, debt-to-income ratio, and other variables
• A debt-to-income ratio under 43%—but this could be lower for borrowers with low credit scores
• No glaring credit report issues, things like bankruptcy or foreclosure
• A down payment of 3% or more or 20% if you don't want to buy mortgage insurance
• A total loan amount of $510,400 or less might be higher depending on the area. If the home is in a "high cost" area, as much as $765,600

Before getting loan approval, the lender must document everything you put in your application, income, debts, assets, and credit score. The lender requires this to ensure you make enough money to afford the payments.

You'll need:

• A valid driver's license or other photo ID
• Pay stubs from the past two months
• Tax returns for the past two years
• Documentation showing how you'll make your down payment
• A financial statement that shows both assets and liabilities
• a credit report ordered by the lender
• An mortgage appraisal of the property
• An inspection of the property

Some Advantages of Conventional Mortgage Loans

It seems there are some advantages to getting a Conventional Mortgage Loan:

• Flexible repayment plans - Conventional loans offer several repayment options. Conventional loans come in 10, 15, 20, 25, and 30-year terms. The shorter the loan term, the lower the interest rate. But the monthly payment will be higher because you're paying off the same loan amount in a shorter time.
• Available Adjustable rates - Conventional loans are smart for people who know they won't remain in their house long and want a shorter-term, adjustable-rate mortgage. This loan carries a lower interest rate than that of a fixed-rate loan.
• No upfront mortgage insurance fee - FHA loans, USDA mortgages, and even VA loans require an upfront insurance fee, usually between 1% and 4% of the loan amount. Conventional loans do not require an upfront mortgage insurance fee, even if the buyer puts less than 20% down. Conventional loans only require a monthly mortgage insurance premium when the homeowner puts down less than 20%.

Three Alternatives To Conventional Loan

Government-backed loans are the principal alternative to conventional Mortgage loans.

Three common types of government-backed loans include:

• USDA Loans - Insured by the US Department of Agriculture, these loans help low-to-moderate income homebuyers purchase homes in eligible rural areas. They require no down payment and increased flexibility with credit score requirements.
• VA Loans - Backed by The US Department of Veteran Affairs, these loans are designed for select military community members, their spouses, and/or other beneficiaries. VA loans require no down payment and no private mortgage insurance.
• FHA Loans - Secured by the Federal Housing Administration, FHA loans allow you to purchase a home with a credit score as low as 500 with a 10% down payment or 580 with a 3.5% down payment. FHA loans can be a great option if your credit score isn't high enough for a conventional loan.

Looking at these alternatives, conventional loans offer the best interest rates and the lowest fees. If your credit score is about 740 and you can afford a 20% down payment, a conventional loan will usually be your best option.