Conventional Loans

 

Common Conventional Loans Questions

• What are conventional loans?

A conventional loan or conforming loan is a mortgage that meets the dollar limits set by the Federal Housing Finance Agency (FHFA).  Conventional loans also meet the criteria set by Fannie Mae and Freddie Mac, which are Government Sponsored Enterprises (GSE). Conventional loans are available through private lenders, such as banks, credit unions, and mortgage companies. Conventional loans can require as little down 3% and remain the most common type of loan. However, conventional loan guidelines can be more restrictive. You can use conventional loans to buy, refinance or renovate a home.

 

• Do conventional loans have specific eligibility requirements?

Conventional loans have standardized loan features and eligibility requirements.  As long as the loan meets FHFA loan limits and the specific guidelines set by Fannie Mae and Freddie Mac, they are available to any individual(s) who qualify. Conforming loan limits (FHFA - Loan Limits) are set by the Federal Housing Finance Authority (FHFA). Each year, FHFA updates its baseline loan limit based on its House Price Index (HPI) report, which tracks the average increase in home values over the previous year. In recent years, the loan limits have increased sooner than FHFA’s announcement as home values have been increasing on consistent basis year after year.

 

• Do conventional loans have specific loan requirements?

Conventional loans are backed by Fannie Mae and/or Freddie Mac, however, private lenders, banks, credit unions and mortgage companies may set minimum credit scores and maximum debt-to-income (DTI) ratios.

 

• Do conventional loans have higher interest rates?

Interest rates on conventional loans are typically a little higher than government-insured loans. This is because the conventional loan risk lies on the private lenders, banks, credit unions and/or mortgage companies. Typically, the risk is assessed when a lender looks at a borrower's ability to repay the loan. If the borrower is considered high risk, the interest rate that they are charged will be higher.

 

• Do conventional loans have additional fees and/or costs?

Conventional loans do not require additional fees and/or costs much like government-insured loans require. However, when obtaining a conventional loan with less than 20% down, you will be required to pay private mortgage insurance (PMI).  PMI rates can fluctuate based on credit scores, debt-to-income ratio (DTI), number of borrowers and down payment amount.

 

• How do you know if a conventional loan is the best loan for me?

Everyone’s financial situation can be different due to numerous factors. Although a conventional loan is the most common loan, it doesn’t make it the best loan for you. Conventional loans can be a great loan, but to ensure you choose the loan that is right for you, it is important to speak with a mortgage professional to discuss your specific situation in detail. Contact me to begin this conversation.