Conventional Loans

 

A conventional loan is a loan that is not guaranteed by any government program such as FHA, VA or USDA.

The rules, or guidelines, that govern conventional loans are set by Investors who make mortgage money available to lenders to loan, then purchase the completed loans from the lenders.

The two largest mortgage money investors are Fannie Mae and Freddie Mac.  Each have their own set of guidelines a lender must follow in order to approve a conventional loan although there are a few variations between the two sets of guidelines.

Fannie Mae and Freddie Mac are Government Sponsored Entities (http://www.investopedia.com/terms/g/gse.asp) and as such, the Federal Housing Finance Agency http://www.fhfa.gov/ supervise their lending activities, including establishing the limits for conforming and conforming high balance loan amounts.

The base conforming loan amount is currently set at $424,100 and loans in this category typically receive the best interest rates.

There are areas of California that are designated as high-cost areas.  To ensure that competitive mortgage funds are available for these markets a category of conforming loans referred to as “high-balance” was created.  These loans can go as high as $625,500 and typically carry a bit higher interest rate than the base conforming loan amount.

There are several different types of loans and loan terms available to choose from depending upon what your financial goals are.  Here are a few:

  • Fixed rate loans – 10, 15, 20, 25 and 30 year terms
  • 10/1 hybrid (fixed rate for 10 years, converts to adjustable in year 11)
  • 7/1 hybrid (fixed rate for 10 years, converts to adjustable in year 8)
  • 5/1 hybrid (fixed rate for 10 years, converts to adjustable in year 6)

Conforming loans are becoming more flexible and there are many conforming loan programs available with as little as 3% to 5% down.  Credit scores need to be strong to qualify for these loans but they are a much more cost effective choice than an FHA loan.

If you are thinking about buying a house and would like to learn if you qualify for a conforming loan with a small down payment feature, make an appointment with a loan officer.  The two most important pieces of information a loan officer will evaluate are your credit scores and your debt to income ratio.  If credit scores and debt to income ratios are in need of work, most loan officers will be able to provide you with guidance on how to improve these areas enough to allow you to qualify for a conventional loan with a minimal down payment.