Conventional Loans

A conventional mortgage or conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity. Such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service. Yet, available through or guaranteed a private lender (banks, credit unions, mortgage companies) or the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Conventional loans are often referred to as conforming mortgages or loans; while there is overlap, the two are distinct categories. A conforming mortgage is one whose terms and conditions meet the criteria of Fannie Mae and Freddie Mac. The most important among those is a dollar limit, set yearly by the Federal Housing Finance Agency (FHFA). Currently in most of the continental U.S., a loan must not exceed $424,100. So, while all conforming loans are conventional, not all conventional loans qualify as conforming. For example, a jumbo mortgage of $800,000 is a conventional mortgage, but not a conforming mortgage. It surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac.

Currently, conventional mortgages represent around two-thirds of the homeowner’s loans issued in the U.S. The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages package into pass-through mortgage-backed securities. These trade in a well-established forward market, which is the mortgage TBA market. Many of these conventional pass-through securities secure into collateral mortgage obligations (CMO’s).

Conventional Loan Rates

Conventional loans’  interest rates tend to be higher than those of government-backed mortgages, such as FHA loans (though these loans, which usually mandate borrowers to pay mortgage-insurance premiums, may work out to be just as costly in the long run).

The interest rate carries a conventional mortgage. This depends on several factors, including the terms of the loan — its length, its size, and whether it is fixed-rate or adjustable-rate – as well as current economic or financial market conditions. Mortgage lenders set interest rates based on their expectations for future inflation; the supply of and demand for mortgage-backed securities also influences the rates. The Federal Reserve makes it more expensive for banks to borrow by targeting a higher federal funds rate. In turn, the banks pass on the higher costs to their customers, and consumer loan rates. This includes those for mortgages. These tend to go up (see The Most Important Factors that Affect Mortgage Rates and How The Federal Reserve Affects Mortgage Rates).

Typically linked to the interest rate are points, fees paid to the lender (or broker). The more points you pay, the lower your interest rate. One point costs 1% of the loan amount and reduces your interest rate by about 0.25%. People planning on living in a home for 10+ years should consider keeping interest rates lower for the life of the loan.

The final factor in determining the interest rate is the individual borrower’s financial profile: personal assets, credit worthiness, and the size of the down payment he or she makes on the residence.

Conventional Mortgage Requirements

In the years since the subprime mortgage meltdown in 2008, lenders have tightened the qualifications for loans.”No verification” and “no down-payment” mortgages have gone with the wind. But, the most of basic requirements haven’t changed. Potential borrowers need to complete an official mortgage application (and usually pay an application fee). They must supply the lender with an extensive check on their background, credit history, and current credit score.

No property ever finances 100%. In checking your assets and liabilities, a lender is looking to see not only if you can afford your monthly mortgage payments (which usually shouldn’t exceed 28% your gross income), but also if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage.


Click here for a quick mortgage "loan inquiry"