Conventional Home loan
A conventional loan is a type of mortgage that is not guaranteed or insured by the United States government. The following loans below are the different types of conventional loans:
- Conforming loans
- Non-conforming loans
- Jumbo loans
- Portfolio loans
- Sub-prime loans
Non-conventional loans, which are insured by the government, are the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the US Department of Agriculture (USDA). Nonetheless, a conventional loan is paid for by the fees collected from mortgage borrowers.
With all the different types of conventional loans, half of them are known as “conforming” mortgages. The reason is because they conform to the guidelines created by two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Since 1970, these two agencies established a purpose to make mortgages more widely available by setting guidelines on the size of loans. These guidelines include loan-to-value ratio, debt-to-income ratio, credit score and history or documentation requirements. Non-conforming loans are ones that are larger than the loan limit set by Fannie Mae and Freddie Mac, which is also known as the jumbo loan. The GSEs also buy mortgages from lenders and sell them to investors in order to securitize mortgages for real estate.
Below are the types of mortgages that Fannie Mae and Freddie Mac purchase:
- Meets the yearly evaluated conforming loan limit
- Loans with borrowers who have minimum credit score
- Meets the GSE guidelines in regards to Debt-to-Income ratios
- Where the borrower has less than 20% equity; Private Mortgage Insurance (PMI) is required
It is very important to understand that Fannie Mae and Freddie Mac do not service the loans they purchase. The lenders are the ones who collect the payments from the companies who are purchasing the loan.