What is a Conventional Home Loan?
A conventional loan is a type of loan that typically has fixed rates and terms, and is not insured or guaranteed by a government agency, such as the Department of Veterans Affairs (VA), the Farmers Home Administration (FmHA), or the Federal Housing Administration (FHA).
Types of conventional home loans
Any mortgage that isn’t insured or guaranteed by government agencies is referred to as a conventional loan. They can consist of:
- Conforming loans
- Jumbo loans
- Non-conforming loans
- Portfolio loans
- Sub-prime loans
Nearly 50% of conventional loans are known as “conforming” mortgages. They are called this name because they abide by the rules put in place by Freddie Mac and Fannie Mae. They aim to make mortgages more affordable and widely available. Both of these enterprises are government sponsored (GSE).
Any of the loans that do not form part of the GSE guidelines are called non-conforming loans. If the non-conforming loan has a loan amount of a value higher than GSE limits, the loans is referred to as a jumbo loan.
Mortgages referred to as portfolio loans are the type of loan that lenders hold on their own books. The mortgage lenders have the option to impose their own rules and guidelines for these loans. They may include features outside the scope of other mortgages, and they aren’t sold on to investors. A unique feature of the portfolio loan may be the option to accept bonds or stocks as mortgage security, which is very useful for those that wouldn’t qualify under standard guidelines.
Also, the sub-prime mortgages are intended for borrowers with the less appealing credit score. This type of conventional loan typically has high fees and interest rates associated with it. This home loan does have certain government rules and regulations in place, but the mortgage in general is not government-backed.
What are the requirements?
In order to qualify for a conventional loan you are required to comply with certain basic criteria, such as:
Credit score – the credit standards will vary with the different lenders, but typically a credit score in the region of 620 or more is sufficient to get approved. However, this will also be subject to other circumstances.
Income – lenders will take a careful look at your monthly income and expenses. For conventional loans, the basic debt-to-income ratio is 28/36. This basic ratio can vary in certain situations with the right mitigating conditions.
History – a further area of consideration is your financial history over the last few years.
Are down payments necessary?
Conventional loans are subject to a down payment. The stipulated amount is subject to a variety of key factors. Typically, the down payment is in the region of 3% to 20% of the total sales price of the home. Your particular amount will be determined by your lender.
What is the interest rate?
The interest rate on a conventional loan will vary from borrower to borrower. It is highly dependent on an individual’s credit score. Mortgage Backed Securities (MBS) are typically used in the process of determining your interest rate.