Conventional loan questions

Nice house with a for sale signConventional loans are mortgages that meet the lending guidelines of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Corporation (Freddie Mac). These two companies supply the mortgagee money to banks and some large mortgage brokers who sell their mortgages to Fannie and Freddie. The conventional loans are not backed by the US government like FHA, VA and USDA home loans.

What is a jumbo conforming loan?

The jumbo conforming loan meets the lending guidelines of the Federal National Mortgage Association (i.e. length of employment, credit score, assets, etc.), however the loan exceeds the maximum lending limits that the Federal National Mortgage Association will purchase. Due to the lending risk, the interest rate is usually higher on a jumbo loan than the conforming loan because the lender is unable to sell the loan to Fannie Mae.

What is a non-conforming loan?

To understand what a non-conforming loan is, it's necessary to learn what a conforming loan is.

Conforming loans are mortgages that meet or "conform" to the underwriting guidelines (rules) of the Federal National Mortgage Association and the Federal Home Loan Mortgage Association, also known as Fannie Mae and Freddie Mac. Fannie and Freddie purchase mortgages from banks and large mortgage brokers, provided the mortgages meet specific underwriting policies. Some of the required guidelines include length of employment, minimum down payment, credit score, and cash assets. The Fannie Mae and Freddie Mac loans are known as "conventional" mortgages. Another consideration for the purchase is loan size. The Federal Housing Finance Agency (FHFA) sets the maximum loan limit for conventional loans.

In most cases, a non-conforming loan is a loan that exceeds the maximum limit set by the Federal Housing Finance Agency. But then again, the loan could meet the lending limit, but, may be considered non-conforming because the applicant failed to meet one or more of the Fannie Mae or Freddie Mac lending rules. Loans that exceed the annual lending limit are also called jumbo loans.

What is the limit for a conforming mortgage loan?

The Department of Housing and Urban Development has a great lookup site that will tell you not only the maximum lending limit for a conventional (conforming) loan, but also the FHA loan limits. The loan limits are listed by US county. HUD loan limit lookup

What is the minimum down payment for a conventional loan?

The minimum down payment for a conventional (also called conforming) loan is 3%. You can use the conventional 97 versus the FHA calculator to estimate whether the 3% conventional 97 program is superior to the FHA loan program.

Why should I get a conventional/conforming mortgage?

1. No Upfront Mortgage Insurance:

Conventional home loans do not require an initial (upfront) mortgage insurance payment. The FHA, VA, and USDA loan programs all require an upfront premium. The "funding fee", as it is called, is usually financed with/into the loan. It should be noted that service related 10% disabled veterans are exempt from the VA funding fee.

Since conventional home loans do not require the upfront mortgage insurance, the loan amount is lower and consequently, the monthly payment is a bit lower.

2. No Monthly Mortgage Insurance:

The FHA and USDA loan programs require a monthly mortgage insurance payment. The monthly mortgage insurance never goes away . . . even with a 20% down payment or equivalent equity. Conventional home loans do not require mortgage insurance with a 20% down payment. Conventional loans do require monthly mortgage insurance with less than twenty percent down payment; however, after paying down the mortgage by 22%, the lender is required to remove the monthly pmi payment.

3. Second Home Loan:

The FHA, VA and USDA loan programs do not permit second home financing, however, you can obtain a mortgage for a second home with a conventional mortgage. The second home mortgage usually requires a 10% minimum down payment.

4. Higher Loan Amount:

Congress establishes the maximum loan limits for FHA, VA, USDA and conventional loan programs. The conventional loan limits are usually higher than the FHA program. There is no loan limit with the VA or USDA mortgage.