CONVENTIONAL FINANCING

Any loan that is not eligible for federal insurance or guaranteed by a government agency such as Housing and Urban Development (HUD), Government National Mortgage Association (GNMA), Federal Housing Association (FHA), Veterans Administration (VA) or the Farmers Home Administration (FmHA) is considered to be a “conventional loan.” Most conventional loans are also considered to be “conforming loans,” meaning that they fit within the guidelines of Fannie Mae or Freddie Mac. The most obvious guideline limitation on conforming loans is the maximum loan limit set by Fannie Mae and Freddie Mac and adjusted each year to account for the change in average home sales prices nationwide.

There are more conventional loan programs available than programs insured by a government agency. Here is a list of a few program types available:

1. fixed rate
2. adjustable rate
3. balloons
4. biweekly
5. graduated payment mortgages
6. convertible (an adjustable-rate loan that may be converted to a fixed-rate loan)
7. shared appreciation mortgages

In addition to the programs available, there are many loan features available for these programs that appeal to specific financing needs:

1. longer or shorter loan terms
2. loan-to-value guidelines that allow higher ratios
3. alternate documentation programs
4. varying income-to-debt ratio requirements (qualifying ratios)
5. adjustable-rate loans with various indexes, margins and cap combinations and change dates (please see the discussion of adjustable-rate loans)
6. mortgage insurance requirements (please see the discussion of private mortgage insurance and FHA mortgage insurance)
7. no-income-verification loans
8. differing appraisal requirements
9. various credit score requirements

If you are trying to decide between a conventional loan or a loan insured by a government agency, here are some key differences that may be important to your financial objectives. First, if mortgage insurance is required on an FHA or conventional loan (VA loans do not require the veteran to pay for mortgage insurance), it can raise your monthly payment. Second, one of the major benefits of a loan insured by a government agency is that down payment requirements are less than those of most conventional programs. Third, conventional loans do have maximum loan amount limitations, but they are usually higher than a similar loan insured by a government agency. Finally, conventional loans offer a more streamlined origination process since they usually have fewer documentation requirements.

In fact, conventional financing can be a very cost-effective way to finance your home because of the involvement of Fannie Mae and Freddie Mac. These institutions buy conforming loans, package them in groups, and sell interests in them to investors. Because they provide a ready means for lenders to sell loans that meet their guidelines, they have fostered a competitive marketplace where lenders compete on interest rates and fees to make those loans. You, the consumer, benefit from this competition.


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