Conventional Home Loans
What is a conventional home loan?
A conventional loan is a loan that is not insured or guaranteed by the government. A conventional loan may be a fixed rate mortgage, variable rate mortgage or a hybrid ARM. Conventional loans are either conforming or non-conforming loans.
Conforming loans adhere to the guidelines set by Fannie Mae and Freddie Mac, including the conforming loan limits for each area. These conforming conventional loans may be sold on secondary markets. They also have a credit score minimum of 620 and an LTV maximum of 97% requirement to qualify.
Non-conforming loans do not follow these guidelines most specifically the loan limits. Non-conforming conventional loans are usually larger, e.g. jumbo loans, and they cannot be sold on secondary markets and so they are considered riskier. They do not necessarily have a standard minimum credit score or maximum LTV, lenders make their own requirements.
Conventional loans are issued by private lenders and unlike FHA, USDA, or VA loans they do not have government backing. That means if the borrower defaults the risk is entirely on the lender. This makes conventional loans riskier for lenders so they tend to have higher qualification standards and down payment requirements. A down payment for a conventional loan can be as low as 3%, but down payments of 20% are common.
The benefit of a higher down payment is that you could get lower monthly payments. The borrower is usually responsible for origination fees, mortgage insurance, and appraisal fees. These closing costs mean that the borrower would have more cash out of pocket expenses unlike with other loans.