Understanding 3 Conventional Loans: A Guide to Mortgage Financing

If you are planning to buy a new home or refinance your current mortgage, you might have come across the term conventional loan. In a nutshell, a conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the lender assumes the risk of the loan and is responsible for determining the borrower's eligibility and underwriting the loan.

There are three primary types of conventional loans: conforming, non-conforming, and jumbo loans. Here's what you need to know about each:

1. Conforming loans

A conforming loan is a conventional loan that meets the guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and sell mortgage loans. Specifically, a conforming loan must meet the following criteria:

• The loan amount must be within certain limits, which vary by county.
• The borrower's credit score must be at least 620.
• The borrower's debt-to-income ratio (DTI) must be no higher than 50%.
• The property must meet certain appraisal and inspection requirements.

One of the advantages of a conforming loan is that it usually comes with a lower interest rate compared to other conventional loans. This is because conforming loans are considered less risky for lenders, given their compliance with Fannie and Freddie standards.

2. Non-conforming loans

A non-conforming loan, also known as a jumbo loan, is a conventional loan that exceeds the limits set by Fannie and Freddie. In other words, it is a loan that is too large to be sold to these entities. Non-conforming loans may have higher interest rates and stricter qualifying requirements than conforming loans.

Here are some of the criteria for a non-conforming loan:

• The loan amount must be higher than the conforming loan limit for the county where the property is located.
• The borrower's credit score must be higher than for a conforming loan.
• The borrower may need to provide additional documentation to demonstrate creditworthiness.
• The borrower's DTI ratio must be lower than for a conforming loan.
• The borrower may need to make a larger down payment or show more cash reserves.

3. Jumbo loans

A jumbo loan is a type of non-conforming loan that is specifically for amounts greater than the conforming loan limits. Jumbo loans typically have stricter qualifying requirements and higher interest rates, as they are considered riskier for lenders.

Some of the criteria for a jumbo loan include:

• The loan amount must be more than the maximum conforming loan limit for the county where the property is located.
• The borrower's credit score must be excellent, typically at least 700.
• The borrower's DTI ratio must be lower than for a conforming loan.
• The borrower may need to provide more documentation and show more cash reserves.

The Takeaway

Choosing the right type of mortgage loan depends on your financial situation, creditworthiness, and borrowing needs. If you are in the market for a mortgage, it is essential to understand the different types of conventional loans available.

If you have a great credit score and are purchasing an expensive home, a jumbo loan may be the best fit for you. If you are looking for a more affordable loan, a conforming loan could be the way to go. Finally, if you need a loan that falls outside the conforming loan limits, a non-conforming loan may be a viable option.

Remember, it's always best to speak with a qualified mortgage professional who can help you navigate the complex world of mortgage financing and guide you in choosing the best option for your needs.