Conventional Loans

What they are and what it means to you

A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in terms and rate.

  • Mortgages not guaranteed or insured by these agencies are known as conventional home loans. They include:
  • Conforming loans
  • Non-conforming loans
  • Jumbo loans
  • Portfolio loans
  • Sub-prime loans

About half of all conventional loans are called “conforming” mortgages because they conform to guidelines established by Fannie Mae and Freddie Mac. These two government-sponsored enterprises (GSEs) buy mortgages from lenders and sell them to investors. Their purpose is to make mortgages more widely available. All conforming mortgages are also conventional mortgages.

Loans that do not conform to GSE guidelines are referred to as “non-conforming” home loans. Non-conforming loans that are larger than loan limits set by the GSEs are often referred to as “jumbo” mortgages. All non-conforming mortgages are also conventional mortgages.

Conventional loans held by mortgage lenders on their own books are called “portfolio” loans. Because lenders can set their own guidelines for these loans and do not sell them to investors, these products may have features that other mortgages do not. For example, a portfolio lender might allow a borrower to use investments like stocks and bonds as security for a mortgage for which she would not otherwise qualify.

Conventional home loans marketed to borrowers with low credit scores are called sub-prime mortgages. They typically come with high-interest rates and fees. The government has created special rules covering the sale of such products, but they are not government-backed — they are conventional loans.

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What are the advantages of a conventional mortgage?

  • Low down payment required (3 percent minimum)
  • Mortgage insurance is required for loans exceeding 80 percent LTV (Mortgage insurance is required on all FHA loans regardless of the loan-to-value)
  • Conventional mortgage insurance is only monthly or single premium (FHA is upfront and monthly premiums)
  • Conventional mortgage insurance will automatically end at 78 percent loan-to-value (FHA will stay for the entire life of the loan)
  • Conventional mortgage insurance is credit sensitive (For FHA, one premium fits all)
  • Conventional loans can cover much higher loan amounts (FHA over county limits)
  • Even though conventional loans may have higher interest rates, their monthly payments may still be lower

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