Conventional Loan Explained
When you’re ready to buy a house, one of the first questions you have to ask yourself – after you find the house of your dreams, of course – is whether or not you’ll choose a conventional loan. A conventional mortgage is a lender agreement that’s not guaranteed or insured by the federal government under the Veterans Administration (VA) the Federal Housing Administration (FHA), or the Rural Housing Service (RHS) of the U.S. Department of Agriculture. Because these types of mortgages can still fall under the purview of Fannie Mae and Freddie Mac, you’ll often find that these government-sponsored agencies still set the conventional loan limits that can dictate the type of conventional mortgage you’re able to obtain. If you’re still confused by all the different mortgage options out there, learning a little more about conventional loan requirements can make you better prepared to meet with a potential mortgage lending officer.
Conventional Loan History
At one point in the United States, conventional loans were the only mortgage loans available and they were all issued by local lenders such as banks, savings and loans, and credit unions. These private lenders kept and serviced these loans in their own portfolio until they were either paid in full or foreclosed on.
In the late 1930’s, a secondary market was created which allowed these local lenders to sell their loans, getting the full payment much more quickly. Then, the organizations that purchased the loans owned the agreement and collected payments from the borrower. Today, it is very common for lenders to sell their loans on the secondary market.
Types of Conventional Loans
Conventional loans may be conforming or non-conforming. Conforming loans follow the terms and conditions set by Fannie Mae and Freddie Mac. The 2015 conforming loan limits remain unchanged in most of the country, with the conventional loan limits increasing in only 46 counties. These guidelines put the maximum price for a first mortgage at $417,000 for a single-family dwelling. If the purchase is made outside of the 48 contiguous United States (in Guam, the Virgin Islands, Hawaii, or Alaska), or the dwelling is for a two-family, three-family, or four-family configuration, larger values apply before the loan is no longer considered a conventional loan.
Nonconforming loans don’t meet Fannie Mae or Freddie Mac qualifications, but they are still considered conventional. Jumbo loans are one example of a conventional loan that does not meet Fannie Mae or Freddie Mac guidelines. A jumbo loan is a loan with a dollar value above the maximum loan amount established by Fannie or Freddie. Jumbo loans usually have a higher interest rate.
Conventional loans can be fixed-rate mortgages, adjustable-rate mortgages, balloon mortgages, or hybrid loans. Almost any type of loan that you take, if not issued by a government entity, is considered a conventional loan.
Choosing a Mortgage Loan
Whether you’ve been buying and selling homes for decades or you’re a first-time homebuyer, it’s not always easy to determine whether you should go with a conventional loan, an FHA loan or any of the other loan types available to you. This is where your mortgage lending officer will be an invaluable resource. Not only will they be familiar with the ins and outs of the different types of mortgages available, but they should also be able to provide the fresh perspective on your current financial situation that can help match you to the most advantageous mortgage loan options you qualify for.