Conventional loans are mortgage loans that are not backed, guaranteed, or insured by any government agency like the Federal Housing Administration (FHA), United States Department of Agriculture Rural Housing Service (USDA Rural Housing Service), or the Department of Veterans Affairs (VA).
In today’s climate, about 2/3 of all mortgages are conventional loans. Since these loans aren’t backed by the Federal Government, lenders have higher qualification requirements for these loans in comparison to their loan products that are backed or insured by the FHA, USDA, or VA.
|Credit Scorehttp://usda||Your credit score will need to be at least 680|
|Debt to income ratio (DTI)||Many lenders prefer a DTI 36% or better. However, the max is generally around 43%. Fannie Mae recently changed their standards to 50%, though this is generally considered risky.|
|Down Payment||With a down-payment as low as 3% borrowers typically have to pay Private Mortgage Insurance that can be canceled once the loan balance drops to below 78% of the home’s value.|
There are essentially two types of Conventional loans.
Roughly half of all conventional loans in the U.S. are “conforming” mortgages. This means that these conventional loans conform to the guidelines that Fannie Mae and Freddie Mac have set. Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSE’s). And, the reason GSE’s set standards for conforming conventional loans is because these types of loans can be packaged in mortgage-backed securities. Other investors also trade or purchase them.
One example of Non-Conforming loans are loans like jumbo mortgages. These are loans for amounts higher than the maximum standards set by the GSE’s. Non-conforming loans are held by mortgage lenders on their own books as “portfolio” loans.
The standards for Conventional Loans are higher than the standards for loans which are government-backed since they present a higher risk to the private lenders (banks, credit unions, mortgage companies).