A conventional mortgage
refers to a loan that is not insured or guaranteed by the federal government. A
conventional, or conforming, mortgage adheres to the guidelines set by Fannie Mae and FreddieMac. It may have either a fixed or adjustable rate. The maximum
limit for a conforming loan depends on the county and state you live in and can
be found by Fannie Mae Loan Limits.
Requirements
If you in income and credit
qualify and want to purchase a new home or merely lower the rate or term of you
existing home, a Conventional loan may be what is best for you. Conforming
loans require a down payment/equity as little as 3%* for a fixed rate term or
10%* for an Adjustable rate.
If you need to take cash out
for any purpose Conventional financing will allow you to borrower up to 85%* of
your home’s value. You can apply for pre-approval of a loan which helps you
determine what you can afford to borrow (pre-approval is not guaranteed) or you
can apply for a loan after you find a property you are interested in buying.
Always check with your Loan Officer for specific guidelines.
Conventional loans can be
either Fixed or an adjustable rate. Fixed-rate mortgages have a set interest
rate for the entire length of the mortgage term which can be between 10 and 30
years. An adjustable-rate mortgage (ARM) has a term of 30 years with a low
introductory rate for a fixed period followed by periodic adjustments according
to a specific benchmark, typically a specific LIBOR or a T-Bill index.
The dominant number of loans
made in the conventional market use Fannie Mae and Freddie Mac guidelines for
conforming loans. Conventional loans are "conforming" if they are
generally $417,000 or less for a single-family home. Conforming loan limits can
be higher in pricier regions of the country. For example, in such states as
Alaska and Hawaii, it's $625,500.
There are also established
guidelines for borrower credit scores, income requirements and minimum down payments. For
example, most conventional loans require somewhere between 5 percent and 20
percent down.
Most conventional mortgages
have either fixed or adjustable interest rates. Typical fixed interest rate
loans have a term of 15 or 30 years. A shorter-term loan usually results in a
lower interest rate. Adjustable-rate mortgages, or ARMs, fluctuate in relation
to the rate of a standard financial index, such as the LIBOR. Monthly payments
can go up or down accordingly.
There are two types of Conventional loans:conforming and non-conforming. Conforming loans have terms and
conditions that comply with guidelines dictated by Fannie Mae and Freddie Mac.
These two companies purchase mortgage loans from lenders then package them into
securities and sell them to investors. Fannie Mae and Freddie Mac guidelines
establish the maximum loan amount, borrower income, credit standards and the
down payment necessary to get a home loan.
Loans that are above the
maximum loan amount set forth by Fannie Mae and Freddie Mac guidelines are called
non-conforming loans, and are also known as Jumbo loans. These loans are
distributed on a smaller scale and therefore have higher interest rates than
regular conforming loans.
Conventional loans give the
borrower more flexibility when it comes to loan amounts while an FHA loan caps
out at $271,000 in most areas. Conventional loans often do not come with the
amount of provisions that FHA loans do. Conventional loans do not require
mortgage insurance if the loan to value is less than 80%-in other words, if the
borrower can make a down payment of 20%.
