7 Types of Conventional Loan Programs to Choose From
Updated: Feb 2
Understanding home financing can be hard, especially when there are so many conventional loans to pick from. In this article, we break down seven different types of conventional loans, detailing their specifics in an easy-to-grasp manner. Welcome aboard! Let's demystify mortgages together.
Key Takeaways
✅ Documentation Requirements: Conventional loans necessitate a range of documents, including income proof and employment verification, to qualify.
✅ Variety of Options: From conforming and nonconforming loans to jumbo and low-down-payment options, conventional loans offer a wide array of choices to suit different financial needs.
✅ Conforming vs. Nonconforming: Conforming loans, governed by Fannie Mae and Freddie Mac guidelines, usually offer lower interest rates, while nonconforming loans offer more flexibility but may come at a higher cost.
✅ Accessibility for First-Time Buyers: Options like low or zero down payments make conventional loans particularly appealing for first-time homebuyers or those with limited savings.
✅ Rate Stability and Flexibility: Fixed-rate loans offer a stable interest rate for the loan's duration, whereas adjustable-rate loans offer rate flexibility but may involve more risk.
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Interest Rates For Conventional Mortgages
Conventional loan products offer a variety of interest rate options, including today's competitive rates. Adjustable rates are also available for borrowers seeking flexibility in their mortgage payments.
As a customer looking for information on conventional mortgages, you might be wondering about the current loan rates. Conventional loan rates can fluctuate depending on various factors such as your credit score and down payment amount.
It's important to note that specific rates are not mentioned in the provided text. However, by understanding the Terms & Key Requirements for a Conventional Loan, you can better navigate the borrowing process and find competitive interest rates that suit your financial goals.
Remember that conventional loans generally offer less costly borrowing options compared to government-backed loans like FHA mortgages. So, whether you're considering a conforming loan adhering to guidelines set by Fannie Mae and Freddie Mac or exploring other types of conventional loans like jumbo loans or fixed-rate loans, it's crucial to stay informed about today's market conditions and shop around for the best mortgage lender suited for your unique needs.
One advantage of conventional mortgages is that they offer borrowers the option of adjustable rates. With an adjustable-rate mortgage (ARM), your interest rate can change over time, typically after an initial fixed-rate period.
This flexibility allows you to take advantage of lower interest rates in the future if market conditions improve. It's important to consider factors such as how often the rate adjusts and any potential caps or limits on how much it can increase or decrease.
Remember, with an ARM, your monthly mortgage payment may go up or down depending on changes in interest rates.
7 Types Of Conventional Mortgage Loans
Get to know the different types of conventional loans available and find the perfect fit for your financing needs. Read more to make an informed decision.
🎯 Conforming Loans
As an expert in conventional mortgages, I want to highlight the importance of understanding conforming loans. Conforming loans are a specific type of conventional loan that adhere to guidelines set forth by Fannie Mae and Freddie Mac, two government-sponsored enterprises.
These loans typically have lower interest rates and more favorable terms than nonconforming loans. It's worth noting that conforming loans come with a maximum loan limit, which in 2024 is $766,500 for a single-family home in most U.S. counties.
This information is crucial for clients who are looking into conventional mortgage options as they navigate the complexities of the lending process.
🎯 Nonconforming Or 'Portfolio' Loans
Nonconforming or 'portfolio' loans are a type of conventional loan that does not have to adhere to the guidelines set by Fannie Mae and Freddie Mac. Unlike conforming loans, which are sold on the secondary market, portfolio loans are held by the lender themselves.
These loans, often falling under the category of non QM loan requirements, are commonly used for borrowers who don't meet the strict criteria set by conventional lenders. Such borrowers may have unique financial situations or credit histories. One prevalent type of nonconforming loan is a jumbo loan, which exceeds the maximum limits set for conforming loans.
It's important to note that while nonconforming loans provide more flexibility, they may come with higher costs for borrowers in terms of interest rates and fees.
🎯 Jumbo Loans
One of the 7 types of not conforming conventional loans that you may come across is a jumbo loan. Jumbo loans are nonconforming loans that go beyond the maximum loan limits set for conventional mortgages. These loans are typically used to finance higher-priced properties, often in luxury real estate markets.
Because of their larger size, jumbo loans usually require a larger down payment and have stricter qualification criteria. However, they offer borrowers the opportunity to secure financing for their dream home or investment property with competitive interest rates and terms.
It's important to note that jumbo loans are still considered conventional loans and can be a viable option for those who need a large mortgage amount.
🎯 Low-Down-Payment And Zero-Down Conventional Loans
As a first-time homebuyer exploring conventional loan options, you'll be glad to know that low-down-payment and zero-down conventional loans are available to help make your homeownership dreams a reality.
These types of loans require less money upfront, making them an attractive option for those who may not have substantial savings or want to preserve funds for other purposes. With minimum down payment requirements as low as 3%, these loans allow you to put less money down while still securing financing for your new home.
Additionally, if you're eligible for certain assistance programs or grants, it's possible to obtain a zero-down conventional loan which eliminates the need for any upfront payment altogether.
This can greatly reduce the financial burden associated with buying a house and open doors for more individuals and families to become homeowners. So whether you have limited funds set aside or simply prefer to keep your savings intact, low-down-payment and zero-down conventional loans offer flexibility and accessibility in the world of mortgage finance.
🎯 Fixed-Rate Loans
When it comes to conventional loans, fixed rate conventional loans loans are a popular option among borrowers. With a fixed-rate loan, the interest rate remains consistent throughout the life of the loan repayment period, providing stability and predictability for homeowners.
This means that your monthly mortgage payment will stay the same over time, which can make budgeting easier. Fixed-rate loans are often associated with long-term mortgages like 30-year or 15-year terms.
It's important to note that while fixed-rate loans may offer peace of mind, they typically require a higher credit score and down payment compared to other types of conventional loans. However, their reliability and ability to lock in a consistent, fixed interest rate can make them an attractive choice for many homebuyers.
🎯 Nonqualified Mortgages (Non-QM)
Nonqualified mortgages are a type of conventional loan that is given to borrowers who can't meet the requirements for a traditional loan. These loans are often given to borrowers with lower credit scores or unique financial situations. Some typical Non-QM mortgage types are: No Income Verification, Non-Warrantable Condos, Foreign Nationals, Jumbo Loans, Asset Depletion Mortgages, Borrowers with Bad Credit, Etc.
While nonqualified mortgages can offer greater flexibility, it's important to note that they may come with higher mortgage rates and other uncommon features. If you're considering a nonqualified mortgage, it's essential to understand the terms and conditions associated with these types of loans in order to make an informed decision.
🎯 Non-QM Mortgage Program Types:
Plus more! See our non-QM mortgage programs page here for a complete list.
🎯 Adjustable-Rate Loans
Adjustable-rate loans are a type of conventional loan that offer borrowers the flexibility of changing interest rates over time. With these loans, the initial interest rate is usually lower than that of a fixed-rate loan, making it an attractive option for some homebuyers. These are not to be considered Home Equity Lines of Credit as they carry adjustable rates as well, they are not considered conventional loans.
However, it's important to note that adjustable-rate loans come with the risk of future rate increases. The interest rates on these loans can adjust periodically based on market conditions and other factors, which means your monthly mortgage payments could increase in the future.
Before opting for an adjustable-rate loan, it's vital to assess your financial situation and risk tolerance to determine if this loan type aligns with your needs. By examining the conventional mortgage examples provided above, you'll be better equipped to make an informed decision regarding your home mortgage.
Conventional Vs. Conforming: What's The Difference?
In the world of mortgages, two terms you'll frequently come across are "conventional" and "conforming." While they may sound similar, there are key differences between these two types of loans.
Let's break it down.
Conventional loans refer to mortgages that are not backed by government entities like the Federal Housing Administration (FHA) or Veterans Affairs (VA). On the other hand, conforming loans adhere to guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac.
The main difference lies in loan limits. Conventional loans have maximum lending limits determined by the loan size and your location, whereas conforming loans require borrowers to stay within specific loan amount thresholds set by Fannie Mae and Freddie Mac.
It's important to note that while all conforming loans are conventional, not all conventional loans are conforming. Non-conforming or 'portfolio' loans fall outside these set boundaries and can be more flexible but typically have different requirements.
Understanding these distinctions will help you navigate your path towards securing the right mortgage for your needs. Remember, when choosing between a conventional or a conforming loan, consider factors such as credit score, debt-to-income ratio, down payment amount, and loan limits to make an informed decision.
What Credit Score Do I Need For A Conventional Loan?
To qualify for a conventional loan, you will generally need a minimum credit score of 620. This is the baseline requirement set by most lenders. However, keep in mind that your credit score is not the only factor taken into consideration when applying for a conventional loan.
Lenders will also assess your overall financial health, employment, credit history, debt-to-income ratio, and other factors to determine your loan eligibility and interest rate. It's important to note that borrowers with a credit score below 620 may still have options available to them, such as FHA loans which are backed by the Federal Housing Administration.
So while having a good credit score can improve your chances of getting approved for a conventional loan, it's not necessarily an absolute requirement.
How A Conventional Mortgage Works
To understand how a conventional mortgage works, you need to know the required documentation, employment verification process, and property requirements.
Required Documentation For A Conventional Mortgage
Navigating through the process of acquiring a conventional mortgage entails providing necessary documentation that verifies your financial health. Lenders require proof of income to confirm that you can comfortably sustain monthly mortgage payments.
This evidence often includes recent pay stubs, tax returns, or W2 forms spanning the last two years. Besides, lenders need copies of bank and investment account statements as proof of assets.
These financial details are essential in demonstrating your ability to cover down payments and closing costs attached to the loan agreement. Also crucial is employment verification whereby lenders may directly contact your employer or ask for recent paycheck stubs to ascertain job stability over time.
Lastly, identification documents like a driver's license and social security number form an integral part of this step ensuring attribution accuracy during credit report evaluation which feeds into your overall suitability for loans.
Employment Verification
Navigating the path to securing a conventional loan requires you to pass through several checkpoints. One such crucial stage is employment verification. Loan lenders and private lenders place immense emphasis on your job stability as it directly impacts your ability to make monthly mortgage payments consistently.
The process of employment verification involves proving that you have stable, reliable income, which assures the lender of your capacity to handle mortgage payments. The typical requirement is two years of consistent employment history in related fields.
An exception can be made if you recently graduated and took up a position in your field of study or training. Moreover, most conventional loans require recent pay stubs or W-2 tax forms as proof of income for the present year and sometimes prior years too.
This method allows them not only to verify your employment but also assess its stability over time.
Property Requirements
Before securing a conventional mortgage loan, your chosen property must meet specific criteria set by lenders. These requirements ensure that the property is worth the amount you intend to borrow and it's not a risky investment for the lender.
A professional appraisal will typically be conducted to assess the home's value and condition. The property should not have any serious defects or health hazards like mold or lead paint which could decrease its value over time, as such issues can hinder your chances of getting approved for a conventional loan.
So, whether you're planning on purchasing a single-family home, condo, multi-unit dwelling, or even invest in certain types of manufactured homes - meeting these 'property standards' is an essential step in securing most conventional loans from private lenders including banks and credit unions.
Things You Should Know: Conventional Loan Requirements
Conventional loan requirements include factors such as debt-to-income ratio, employment and income verification, private mortgage insurance, and closing costs.
Debt-to-Income (DTI) Ratio
One important factor in obtaining a conventional mortgage is the debt-to-income (DTI) ratio. This is the percentage of your monthly income that goes towards paying off debts, including your mortgage payment.
Lenders assess this ratio to determine if you can afford to take on more debt and make timely payments. Generally, a lower DTI ratio is preferred by lenders, with most requiring a maximum DTI of 49.99% on conventional loans..
Keep in mind that different loan programs may have different requirements. It's essential to manage your debts responsibly and maintain a good credit score to increase your chances of qualifying for a conventional loan.
Employment And Income Requirements
To qualify for a conventional loan, lenders typically require proof of stable employment and income. This is to ensure that borrowers have the financial means to repay their mortgage. Lenders will usually ask for at least two years of steady work history, whether it's with the same employer or in the same field.
Additionally, they will review your income to determine if you can afford the monthly mortgage payment. Generally, lenders prefer a debt-to-income ratio (DTI) below 43 or 45 percent, which means your monthly debt payments should be no more than this percentage of your gross monthly income.
It's important to note that each lender may have slightly different requirements, so it's best to consult with them directly regarding their specific guidelines.
Private Mortgage Insurance
Private Mortgage Insurance (PMI) is an important aspect of conventional loans. It's a type of insurance that protects the lender in case the borrower defaults on their mortgage payments. PMI is typically required if the borrower makes a down payment of less than 20 percent of the home's purchase price.
The cost of PMI can vary between 0.3 and 1.5 percent of the loan amount annually, which is added to the borrower's monthly mortgage payment until they reach 20 percent equity in their home. While it may seem like an additional expense, PMI enables borrowers with smaller down payments to qualify for a conventional loan and achieve their homeownership dreams sooner rather than later.
If is important to note that FHA mortgage insurance premium is calculated differently. It's important to understand the differences as this can affect your monthly payment.
Closing Costs
Now, let's talk about closing costs when it comes to conventional mortgages. When you're buying a home and taking out a loan, there are additional fees that need to be considered beyond just the down payment.
These are known as closing costs. Closing costs typically range from 2% to 5% of the total loan amount and can include things like appraisal fees, attorney fees, title insurance, and property taxes.
It's important to note that these costs can vary depending on the lender and location of the property. However, one thing to keep in mind is that closing costs are typically higher for conventional loans compared to government-backed loans.
To help manage these expenses, some borrowers opt for a no-closing-cost mortgage option where the lender covers part or all of these fees by slightly increasing the interest rate on your loan.
This allows you to finance your closing costs into your mortgage rather than paying them upfront.
Conclusion
In conclusion, understanding the different types of conventional loans available can empower you to make informed decisions when it comes to financing your home. Whether you're looking for a conforming loan, jumbo loan, or a low-down-payment option, there is likely a conventional mortgage that suits your needs.
With careful consideration of factors like credit score, debt-to-income ratio, and down payment amount, you can confidently choose the right type of conventional loan for your unique situation.
FAQs
Are there conventional loans for fixer-uppers or home renovations?
Yes, there are conventional loans that can be used to finance the purchase and renovation of a fixer-upper. Some of the most popular conventional loans for fixer-uppers include the Fannie Mae HomeStyle® Renovation loan and the Freddie Mac CHOICERenovation® mortgage. These loans typically allow for lower down payments than traditional mortgages, and they can offer competitive interest rates.
What is the difference between conforming and non-conforming loans?
Conforming loans adhere to specific guidelines set by Fannie Mae and Freddie Mac regarding borrower creditworthiness, income limits, down payment requirements, and loan amount limits. Non-conforming loans do not meet these criteria and typically have higher interest rates as they carry more risk for lender
What are conventional mortgages?
Conventional mortgages are the most common type of mortgage in the United States. They are not insured or guaranteed by the government, but they are still offered by private lenders. Conventional mortgages typically have stricter credit requirements than government-backed loans, such as a a FHA loan and USDA Loans. However, they also offer lower interest rates and other benefits.
What is the Federal Housing Finance Agency (FHFA)?
The Federal Housing Finance Agency (FHFA) is an independent federal agency that regulates and oversees the housing government sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. The FHFA was created by the Housing and Economic Recovery Act of 2008 (HERA) in response to the financial crisis of 2008.
Philip Bennett
Philip is the owner and Licensed Mortgage Broker at Bennett Capital Partners, Bus. NMLS # 2046828. He earned his degree in Accounting and Finance from Binghamton University and holds a Master's Degree in Finance from NOVA Southeastern University. With more than 20 years of experience, Philip has been a leader in the mortgage industry. He has personally originated over $2 billion in residential and commercial mortgages.
Learn more about Philip Bennett's background and experience on our Founder's page. Whether you're a first-time homebuyer or a seasoned real estate investor, our team is here to help you achieve your real estate goals. Don't wait any longer, contact us today and let us help you find the right mortgage for your needs.
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