Conventional loans are considered the ‘garden variety’ of mortgage programs. And while the term ‘conventional loan’ is defined as any mortgage that isn’t guaranteed or insured by a government agency, conventional loans can be either “conforming” or “non-conforming”. Conforming loans are conventional programs that meet or ‘conform’ to guidelines set forth by the Federal Housing Finance Agency (FHFA), as well as the funding criteria for either Fannie Mae and Freddie Mac.

Conventional Loans: Conforming

Conventional Conforming Loans follow the terms and conditions set forth by Fannie Mae, Freddie Mac and the FHFA. In the spectrum of mortgage loan requirements, conventional conforming loans are direct and straightforward. Good credit scores, sensible down payments, and fully documented income and assets are the standard for conforming loan approvals. The conventional conforming 30-year fixed-rate mortgage has been a pillar of the US housing market and the most popular American mortgage for decades.

Conventional Loans: Non-Conforming

A non-conforming loan is any mortgage not backed by the government and also doesn’t meet loan requirements for Fannie Mae, Freddie Mac and the FHFA. Conventional non-conforming loans are scarce because they involved many of the risky home lending practices leading to the the 2008 Financial Crisis.

Defunct non-conforming mortgage programs include sub-prime loans, stated income loans, no income verification loans (NI), no asset verification loans (NA), and even no documentation mortgage products (NINA or NINJA). Surviving non-conforming mortgage programs must now fully document the applicant’s income and credit history.

The concept of conventional loans dates back to 1938 during the depths of the Great Depression. That’s when The Federal National Mortgage Corporation, also known as ‘Fannie Mae‘, was founded by the United States Government.

Fannie’s primary purpose was to stimulate the housing market through expanded access to the secondary market for home mortgages. In 1970, Fannie’s younger brother ‘Freddie Mac’ was created, also known as Federal Home Loan Mortgage Corporation. Freddie further expanded market investment for conventional loan paper. Thanks to Fannie and Freddie, American banks have issued more residential mortgages than anywhere else in the world.

What are the advantages of Conventional Loans versus other types of loans?

Conventional Mortgage Loans are Ideal for Borrowers with Excellent Credit and a Substantial Down Payment…

Conventional loan requirements are more credit score driven than other loan types and at least a 620 FICO score is generally required to obtain approval for conventional loans.Conventional Loan guidelines are currently written in a way that a borrower with a 740+ credit score can usually obtain the best interest rate possible. As a borrowers credit score decreases below a 740, sizable fees and rate increases could be added, in excess of the 1-2 percent range. If your credit score is less than perfect, an FHA Loan, USDA Loan or VA Loan could be a better fit for you.

Conventional Loans Can Usually be Obtained With Less Hassle…

Conventional mortgages generally have fewer underwriting hurdles than FHA, VA or USDA Loans, which can take longer to process because of the extra guidelines and procedures.

Conventional Mortgages Can Build Equity Faster…

Because conventional loans usually require a higher down payment (usually 3% – 20%) than the other loan types, home equity can build quicker.

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What factors determine if I am eligible for a Conforming Loan?

To be eligible for a conforming loan, your monthly housing costs (mortgage principal and interest, property taxes, and insurance) must meet a specified percentage of your gross monthly income. Your credit background will be fairly considered. At least a 620 FICO credit score is required to obtain an conventional conforming loan approval. You must also have enough income to pay your housing costs plus all additional monthly debt.

Conforming Loan Programs

Conventional conforming loans are mortgages that meet specific guidelines that are set forth by Fannie Mae and Freddie Mac.  The best-known characteristic of conforming loans is the maximum loan amount of $424,100. While conventional mortgages have traditionally demanded a 20% down payment and borrower credit scores of 680 or above, recent rule changes have enabled home shoppers to purchase a home with as little as 3% percent down. Conforming loans can be used to finance Primary Residences, Second Homes and Investment Property.

80% LTV Conventional Loans

The standard 20% down payment conventional loan has long been a pillar of the U.S. housing market. 80% loan-t0-value conventional loans are still the best deal for mortgage borrowers that have enough cash for the down payment (purchase) or enough home equity (refinance) to make it happen.  There’s no private mortgage insurance (PMI) required for conventional 80% loan-to-value home loans, and that equals big savings for the homeowner.

90% LTV Conventional Loans

While 10% down conventional loan programs still fall under “standard” conventional loan requirements, they also require mortgage insurance.  That means conventional 90% loan-to-value applicants must also meet the requirements for the PMI mortgage insurance provider.

95% LTV Conventional Loans

5% down conventional loan options have historically been the highest loan-to-value conforming loan choice available.  While that recently changed with the rise of 3% conventional loan programs, 5% conventional loan guidelines were the lowest down payment conforming loans still considered ‘standard’.  95% LTV conventional loans usually contain a higher PMI insurance rate than 90% LTV loans.

97% LTV Conventional Loans

For those that qualify, the conventional 97% mortgage is then of the best first time home buyer programs around for applicant’s looking for a low down payment and with the lowest fees possible. Fannie Mae offers several conventional 97% loans for first time homeowners including “HomeReady®”, ‘standard’ and rate-term refinance. Freddie Mac also offers their own version of the 3% down conventional loan, “Home Possible®”.  All 3 percent down mortgage programs require some form of mortgage insurance.

Conforming Purchase Loans

Conforming purchase loans work well for applicants with a 20% cash for a down payment, good income and credit scores because there aren’t any upfront fees or mortgage insurance for borrowers with loan-to-value ratios above 80%. They also work well for buyers with lower down payments that also have good credit scores and debt-to-income ratios because conforming loans have lower fees than other mortgage programs. Applicants can typically get approved with credit scores in the 700+ range. Notable advantages of conforming purchase loans include:

  • 3% – 20% Down Payment Requirement (below 20% down requires mortgage insurance)
  • Up to 6% Seller Concessions Allowed (with 10% down payment or more)
  • No Mortgage Insurance Requirement (with 20% down payment or more)

Conforming Refinance Loans

Conforming refinance loans are a good options to consider for borrowers with good credit scores that want to lower their mortgage rate or even get some cash back. These loans have low fees, low interest rates and even offer options for homeowners with limited or negative equity in their property.

Conventional Rate-Term Refinance

You can refinance up to 97% of your home’s appraised value for a lower interest rate and payment. Conventional 97% loan options often share the same low interest rates with standard 80% loan-to-value conventional mortgage loans.

Conventional Cash-Out Refinance

You can refinance up to 80% your home’s appraised value to take cash out from it’s equity with a Conforming cash-out refinance.  And the best part is you won’t have any mortgage  insurance with your new mortgage.

Conventional Underwater Refinance (HARP Refinance)

Appraisal is not required for HARP Refinance.  No employment verification, income verification or credit verification requirements. Conforming Underwater or Low-Equity Refinance

Term Lengths

Fannie Mae and Freddie Mac both offer the following popular conforming loan programs up to a $424,100 maximum loan amount:

Conventional Conforming 30-Year Fixed Rate Mortgage – Maximum LTV for 30-year conventional loans is 97%.

Conventional Conforming 15-Year Fixed Rate Mortgage – Maximum LTV for 15-year conventional loans is 97%.

Conventional Conforming 5/1 Adjustable Rate Mortgage – Maximum LTV for conventional adjustable-rate mortgages is 90%.

Other less popular conforming loan terms are also offered, although they aren’t as common and usually include a small premium to the interest rate. Less popular conforming programs include the 10 Year and 20-Year fixed-rate mortgage as well as 7/1 and 10/1 adjustable rate mortgage programs.

Conforming Loan Limits

General Conventional Conforming Loan Limits

UnitsContinental U.S. and Puerto RicoAlaska, Hawaii, Guam, U.S. VI

Conforming High-Balance Loans

Some of the current conventional mortgage programs offer even more flexibility making financing available in situations that weren’t previously possible. In recent years, Fannie Mae and Freddie Mac have also offered jumbo conforming loans to accommodate borrowers in higher cost areas across the country. Conforming jumbo loans, also known as “Super Conforming” or “High Balance” loans, are offered up to a maximum loan amount of $625,500 on a county by county basis throughout the U.S. with the following terms:

Jumbo Conforming Loan Limits for High Cost Areas

UnitsContinental U.S. and Puerto RicoAlaska, Hawaii, Guam and U.S. VI

Like the standard conforming loans, jumbo conforming mortgages are also offered with less popular terms that may be more difficult to find.  The basic and jumbo loan programs make a large percentage of homes in the U.S. eligible for conventional conforming finance. You can see what the conforming loan limit for your area here.


Non-Conforming Loan Programs

In the decades leading up to the Financial Crisis of 2008, conventional non-conforming loans had grown to become the largest category of mortgages in America. Non-conforming loan programs included countless variations of sub-prime loans, stated income loans, no income verification loans (NI), no asset verification loans(NA), and even no documentation required loans (NINA and NINJA). As a result, non-conforming loans were the largest contributor to the financial collapse and mortgage meltdown leading to their own demise. The few surviving non-conforming loan programs are required to fully document the borrower’s income and credit history due to tightened regulations.

Non-conforming loans are not insured by a government agency like the FHA, USDA, or VA so they can be conceived and offered by any financial entity. Conforming loans have stringent guidelines for down payments, credit scores, debt-to-income ratios, and bankruptcy history.  That’s why there’s a large cross-section of applicants that are worthy of mortgage credit, yet still do not meet guidelines set by Freddie Mac or Fannie Mae.

Non-conforming loans have traditionally been offered for a variety of reasons, usually to satisfy a public demand. For example, conforming loan programs only offer mortgages up to a maximum loan amount of $417,000 in most areas. If a borrower needs a mortgage for more than that, they would likely consider a non-conforming jumbo loan.  Another example is if an applicant has little or no money for a down payment or less than excellent credit, they probably won’t qualify for a conforming loan.  Instead, they’re better served pursuing non-conforming options or government insured programs like FHA loans, USDA loans, or VA loans.

Non-conforming conventional loans have always been a broad categorization of mortgages because of their expansive nature, but few programs remain today other than Jumbo Loans and the Home Affordable Refinance Program. As regulations ease, more non-conforming loan programs could start to appear.

Conforming Loans vs. Non-Conforming Loans

Throughout the years, the most popular mortgage in America has been the conventional conforming 30-year fixed-rate mortgage.  Straightforward, common sense lending requirements combined with comparatively low interest rates have been widely viewed as the signature qualities of conforming loans for decades.

In contrast, non-conforming conventional loans have often encompassed nearly every risky lending practice known to man until recently. Conforming vs. non-conforming requirements related to an applicants credit score and history, debt-to-income ratio and loan-to-value ratio are explained here.

Conventional Loan Resources

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