CONVENTIONAL Loans

Conventional loans are a category of mortgages that are not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Within the realm of conventional loans, there are two main types: conforming and non-conforming.

  1. Conforming Loans:

    • These loans meet the guidelines set by Fannie Mae and Freddie Mac, including loan limits, credit score requirements, and debt-to-income ratios.

    • They are typically easier to qualify for and often come with lower interest rates compared to non-conforming loans.

    • Conforming loans must adhere to the loan limits set by the Federal Housing Finance Agency (FHFA).

  2. Non-Conforming Loans:

    • These loans do not meet the standard guidelines set by Fannie Mae and Freddie Mac.

    • They include jumbo loans, which exceed the conforming loan limits, as well as other types like subprime, Alt-A, and interest-only loans.

    • Non-conforming loans often have more flexible terms but may come with higher interest rates due to the increased risk to the lender.

Both conforming and non-conforming loans are part of the broader category of conventional loans, offering different options to suit various borrower needs and financial situations.

Conventional Conforming Loans meet the guidelines set by government-sponsored entities like Fannie Mae and Freddie Mac. Here are some common requirements for a conventional conforming loan:

  • Credit Score: Typically, a minimum credit score of 620 is required, but a higher score may be needed for better rates.

  • Down Payment: A down payment of at least 3% to 20% of the home's purchase price is usually required.

  • Debt-to-Income Ratio (DTI): Lenders generally prefer a DTI ratio of 36% or less, but some may allow up to 45%.

  • Loan Limits: The loan amount must be within the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These limits can vary by location.

  • Property Type: The property must be a primary residence, second home, or investment property.

  • Documentation: Proof of income, employment, assets, and other financial information is required.

  • Private Mortgage Insurance (PMI): If the down payment is less than 20%, PMI is typically required.

  • Appraisal: An appraisal is needed to determine the property's value.

Non-Conforming Loans do not meet the standard guidelines set by Fannie Mae and Freddie Mac. Here are some examples of non-conforming loans:

  • Jumbo Loans: These are loans that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). They are often used for purchasing luxury homes or properties in high-cost areas.

  • Subprime Loans: These loans are offered to borrowers with lower credit scores or poor credit histories. They typically come with higher interest rates to compensate for the increased risk.

  • Alt-A Loans: These are loans that fall between prime and subprime, often used by borrowers who may have good credit but lack traditional documentation, such as self-employed individuals.

  • Interest-Only Loans: These loans allow borrowers to pay only the interest for a certain period, after which they must start paying both principal and interest.

  • Balloon Loans: These loans have lower monthly payments initially, but require a large lump-sum payment at the end of the loan term.

  • No-Doc or Low-Doc Loans: These loans require little to no documentation of income or assets, often used by self-employed borrowers or those with non-traditional income sources.

  • Portfolio Loans: These are loans that lenders keep in their own portfolio rather than selling on the secondary market, allowing for more flexible terms.

These non-conforming loans provide options for borrowers who may not qualify for traditional conforming loans, but they often come with higher interest rates and different terms due to the increased risk to the lender.