When people start to explore mortgage loans, they may become confused by the terms “conventional” or “conforming loan.” The truth is that conventional loans are relatively easy to figure out, particularly for people who have some basic familiarity with the general mortgage process. With the answers to these questions, people will understand the fundamentals of conventional mortgage loans.
How Do Conventional Mortgages Work?
When people get a loan from a bank that is not backed through some government entity, such as the Federal Housing Administration (FHA), their loan is most likely a conventional loan. The term “conventional mortgage” simply means that the government is not providing insurance for the loan, in case the borrower defaults. Lenders are somewhat free to set their own terms for conventional loans, with a few caveats. They must follow laws concerning the types of borrowers who might be approved for a mortgage loan, and provide information about each loan in a specified format.
What Is a Conforming Loan?
There are two government entities that are closely related to the conventional mortgage market, commonly called Fannie Mae and Freddie Mac. These institutions provide underwriting guidelines to lenders on certain types of conventional loans. If the loans meet these guidelines, the loan debt may be purchased by these organizations sometime after closing.
This frees up the lender to lend more money to qualified buyers. Fannie Mae and Freddie Mac specify restrictions on the types of loans that can be offered to different kinds of buyers, and set strict limits on the amount. In order to qualify as a conforming loan in 2018, a one-unit property must have a sale price under $453,100.
Do Conventional Mortgages Require a 20% Down Payment?
Although many potential buyers believe that they must have a 20 percent down payment to get a conventional loan, this is not always true. As a general rule, lenders prefer a larger down payment. This means that the buyer is truly invested into the property, and is much less likely to walk away from it or fail to make payments.
However, conventional loans may have down payment terms as flexible for buyers as FHA loans. Fannie Mae and Freddie Mac each offer conventional loans with a down payment as low as 3 percent. Depending on the loan product an applicant is considering, some or all of those funds for the down payment may come as a gift.
When Should Borrowers Consider Conventional Loans?
Conventional mortgages are labeled conventional because other types may call for special applications or extra hoops to jump through before approval. East Nashville buyers who can meet the more stringent credit, income, and debt requirements of a conventional loan may discover that conventional mortgages allow them more freedom in the types of loans they choose.
Instead of being limited to a 30-year fixed-rate mortgage, they might decide to take on a loan with a shorter or longer term. Borrowers can also choose adjustable-rate loans with a conventional mortgage, which gives them a temporary lower rate in the beginning for a set period, usually a number of years. Conventional loans may allow qualified buyers maximum flexibility in determining how they want to pay back their mortgages.
For many people, buying a home starts with applying for a mortgage. By understanding the distinction between conventional loans, conforming loans, and government-backed mortgages, borrowers can target their loan choices to the options that suit them best.