Conventional loans are not guaranteed or backed by the Federal government or its agencies. Most conventional loans are conforming loans while some are non-conforming loans.
Therefore, all conforming loans are Conventional Loans, however not all conventional loans are conforming loans. The Conventional Loans are defined by lending Institution such as banks, credit unions, mortgages companies however a Conforming Loan is defined by the Lending criteria, i.e conforming to the criteria of Fannie Mae and Freddie Mac guidelines.
Definition of a Conforming Loan: A Conforming loan or Mortgage conforms with the guidelines of Fannie Mae and Freddie Mac. Any loan not conforming with the guidelines of Freddie Mae and Freddie Mac are Non Conforming Loans.
A Conforming Loan typically has a stringent lending criteria and has a lower Interest rate. They can be sold in the secondary mortgage market such as Fannie Mae and Freddie Mac. A non-conforming loan typically has a higher Interest rate.
For High value homes, homes that exceed the maximum loan limits for Conventional Loans, some of our Lenders offer Jumbo Loans. These loans may or may not have a higher interest rate however typically have a more strict lending criteria such as a high credit score, more down payment and reserves. The criteria for Jumbo loans can vary from Lender to Lender.
Freddie Mac is The Federal Home Loan Mortgage Corporation (FHLMC) that is publicly traded government sponsored enterprise. Freddie Mac was chartered by Congress in 1970 so money could keep flowing to the mortgage lenders and to support home ownership and the Rental market. The statutory mission of Freddie Mac is to provide liquidity, stability and affordability to the US Housing market. Freddie Mac is not a government agency but chartered by the Congress as a private company serving a public purpose.
The Federal National Mortgage Association (FNMA) or Fannie Mae was first chartered by the US government in 1938 to help ensure a reliable and affordable supply of Mortgage funds throughout the country.
Both Fannie Mae and Freddie Mac buy mortgages from lenders. They perform an important role in the nation's housing finance system. They buy mortgages from lenders, either hold them in their portfolios or package the loans into Mortgage Backed Securities (MBS) that may be sold in the Secondary Market. The cash raised by selling these mortgages to the enterprise is used by lenders to further use the funds for additional lending.
A Mortgage Backed Security (MBS) is an asset backed security, secured by a mortgage or a collection of mortgages. Fannie Mae and Freddie Mac buy mortgages, package them and guarantee the timely payment of interest and principal on these mortgages. This makes it an attractive investment in the secondary market. The process helps improve the overall mortgage market liquidity and keeps the interest rates lower for home buyers.
To determine whether a loan is going to conform with Fannie Mae and Freddie Mac guidelines, an underwriter will submit the loan file through an automated underwriting system (AUS). Fannie Mae's AUS is called the Desktop Underwriter (DU). Freddie MAC's AUS is called Loan Prospector or LP. Common loan types used in conforming lending are 30 year and 15 year fixed rate mortgages and Adjustable Rate Mortgages.
General Requirements for Conventional Loans:
The Maximum Loan limit for a Conventional Loan is $647,200 conforming loans, Over 647,200 non-conforming Conventional loan. It changes every year and is available at the website of Federal Housing Finance Agency
The Minimum Down Payment required for a Conventional Loan 3%, up to 97% Loan to value (LTV).
As a General Rule of Thumb, The Minimum Credit Score Required for a Conventional Loan is 640 FICO, however it can vary and could go lower.
Usually, 2-4 moths Reserves are required for a Conventional Loan
Up to 3% Seller Concessions allowed on Conventional Loans
Non-Occupying Co-Borrower are not allowed on Conventional Loans
Conventional Loans are not Assumable
2 years of Employment History needs to be verified for Conventional Loans
Borrowers with Bankruptcy are Qualified for a Conventional Mortgage after One Year from Chapter 13 discharge, four years for Chapter 7 filing, or after two years with extenuating circumstances.
Borrowers with Prior Foreclosures a Qualified for Conventional Loans after two years of Foreclosure.
An Appraisal is always Required for a Conventional Loan
Gift Funds are Allowed for Down Payment on a Conventional Mortgage
The Maximum Debt to Income Ratio for a Conventional Loan is 28% / 36%.
Private Mortgage Insurance is Required for a Conventional Loan if down payment is less than 20%, or if a Loan to Value (LTV) is over 80%.
85% maximum Loan to Value (LTV) is Required on Cash-Out Refinances for Conventional Loans.
Related Topics: Loan Limits on Types of Loans What are Conforming and Non Conforming Loans What is "Assumable loan"? What is Fannie Mae What is Freddie Mac What is "Secondary market"? What is the Conventional/nonconforming (e.g., Jumbo, Alt-A) loan? Explain Facts on “jumbo loans” What is a Mortgage Backed Security (MBS) What is Loan to value ratio that triggers private mortgage insurance ? What is a Credit Score What is a Bankruptcy What steps are required during the foreclosure process? What is Debt to Income Ratio and how is DTI calculated What is the Requirement to have a Customer Identification Program in place and verifying the identities of borrowers • Homeowners’ Protection Act (Private Mortgage Insurance (PMI) Cancellation Act)? What is "Cash out refinance"? What are Seller Concessions What is an Appraisal Gift Funds A Fixed Rate Mortgage An Adjustable Rate Mortgage
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