A Conventional mortgage is loan that conforms to the guidelines set forth by Freddie Mac and Fannie Mae, the two government sponsored enterprises that provide liquidity in the mortgage market. A Conventional loan is any mortgage that is not guaranteed or insured by the US government such as VA, FHA or USDA.
According to Wikipedia:
In the United States, a conforming loan is a mortgage loan that conforms to GSE guidelines.
In general, any loan which does not meet guidelines is a non-conforming loan. A loan which does not meet guidelines specifically because the loan amount exceeds the guideline limits is known as a Jumbo loan.
Starting in 1970, Fannie Mae was authorized by the United States Government to purchase residential mortgage loans. Fannie Mae worked with Freddie Mac to develop uniform mortgage documents and national standards for what would come to be known as a conforming loan.
The Office of Federal Housing Enterprise Oversight (OFHEO) set the criteria on what constitutes a conforming loan limit that Fannie Mae and Freddie Mac can buy. Criteria include debt-to-income ratio limits and documentation requirements.
The maximum loan amount is set based on the October-to-October changes in median home price, above which a mortgage is considered a jumbo loan, and typically has higher rates associated with it. This is because both Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market, making the demand for a non-conforming loan much less.
Who Is Fannie and Freddie?
They are both publicly traded companies and Government Sponsored Enterprises (GSEs). They are the largest source of mortgage money in the United States. Fannie Mae was originally introduced as part of President Roosevelt’s New Deal, but was later privatized in 1968. Freddie Mac, often referred to as Fannie Mae’s younger brother, was created in 1970. The sole purpose of the two agencies is to securitize mortgages and provide liquidity in the mortgage markets.
Why Securitize Mortgages?
The process of securitizing mortgage loans and selling them on the secondary market allows banks to continue writing loans for real estate.
For Example: If potential homeowners were approved for a mortgage loan of $250,000, the lender would have to provide the funds necessary to complete the transaction while receiving a payment each month for the next 30 years until the loan was paid off. However, if the bank tied up with their own money for 30 years, they would eventually run out of cash to lend on home loans, auto loans, credit cards, etc.
Fannie and Freddie provide the liquidity needed by purchasing the mortgages, bundling them with thousands of other similar loans and selling them as bonds on the mortgage backed securities market.
Examples of mortgages they purchase:
Loans that meet the conforming loan limit which is evaluated every year
Loans with borrowers who have a minimum Credit Score
Loans that meet the GSE guidelines for Debt-to-Income ratios
Loans that have Private Mortgage Insurance (PMI) as PMI is required for all loans where the borrower has less then 20% equity
Neither Freddie Mac nor Fannie Mae service the loans they purchase. Even though both companies purchase loans from various lenders, a servicing lender will retain the servicing and collect the payments, maintain the escrow account for Fannie Mae and Freddie Mac for a fee.
Additional Information on Conventional Loans
A Conventional Mortgage is a mortgage loan that is not backed by the Government the way FHA loans, USDA Loans or VA loans are. Conventional loans must meet the Fannie Mae/Freddie Mac Guidelines and they require PMI (Private Mortgage Insurance) when a client puts less than 20% down. Note: There are other options available to avoid PMI.
Conventional Loans generally have lower monthly payments than FHA loans because the mortgage insurance premiums are lower even though the interest rates are slightly higher that FHA.
Minimum credit score of 620
The interest rate is heavily waited on the middle credit score.
Minimum 3% - 5% down payment
The minimum down payment for a Conventional loan is usually between 3 - 5% of the purchase price. Some clients may qualify for 3% down payment option. We also offer Special Financing Options with 1% down and reduced PMI.
Can the down payment be a gift?
There are specific guidelines that determine how to structure gift funds. Gift funds on some loans can be 100% but some restrictions apply - Please call me for more information.
Fannie Mae Maximum loan amount in the Triangle is $484,350
Conventional mortgages have a maximum loan amount of $484,350 in the Triangle area and a loan amount above this amount is considered a Jumbo loan. Jumbo loan guidelines are different and the interest rates are higher. Please refer to Jumbo page for more information.
PMI or No PMI
PMI is an important decision you will need to make after carefully considering the pros/cons. There are different Options available. Every client is different and we will help you structure your loan that works best for you and your needs. We offer programs such as 80-10-10 and 80-15-5 options combining first and second mortgage. Call for more details.
Need to use Income from New Job
- Future income must be documented with a signed employment contract
- You must start the new job within 30 days of closing and provide one month of paystubs for income to be considered
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