Conventional loans are not backed by government guarantees and are normally funded by Mortgage Bankers, Banks or Savings and Loans. We define conventional loans as mortgages with equal monthly payments, a fixed term, and a fixed interest rate established when the mortgage was created. Traditionally, these types of loans are originated to conform to FNMA or FHLMC standards. Although, Conventional Loans have no boundaries by definition, they normally meet certain standards.
- Loan to Values
- A conventional mortgage is also defined by its "loan to value" ratio or LTV. The standard for conventional loans is an 80 percent LTV. This means that the loan represents 80 percent of the appraised home value and that the buyer must come up with the 20 percent down payment. However, "Stated Income" and "Asset" loans can be up to 90% and in some cases - can go as high as 100% for exceptional credit - plus an additional 3% to cover closing costs. Keep in mind that closing costs are over and above the down payment.
- Credit
- You must have a higher credit score than FHA and VA loans to qualify for conventional loans. Conventional loans require a 4 year waiting period after a bankruptcy before granting credit. FHA only requires 3 years.
- Employment
- Employment must be verifiable for at least 2 years in the same line of work.
- Assets
- Assets are important when qualifying for a conventional loan. Having cash reserves after escrow closes might be required. Although the FHA allows a gift for any part or even all of the down payment and closing costs, conventional loans require an investment from the borrower for any loan over 80% LTV.
- Property Value
- The appraisal report is the single most important item in a conventional loan package. The appraiser must meet certain guidelines, be approved by the lender and be licensed by the state they do business in.
- Private Mortgage Insurance:
- If the LTV (Loan To Value) is greater than 80%, Private Mortgage Insurance (PMI) is usually required on most conventional loans. Programs can vary based upon coverage requirements. PMI protects the lender against loss from a foreclosure so rates can also vary depending upon the PMI carrier and the loan package.
The value of the property is the only security with a conventional loan. Unlike government guaranteed loans, the lender must recover their investment through foreclosure procedures if the loan goes bad. That is why credit verifications are much more rigorous for conventional loans.
Several broad types of conventional loans include:
- Conforming Loans
- Conforming loans are conventional loans that meet the terms and conditions defined by Fannie Mae and Freddie Mac.
- Jumbo and Non Conforming Loans
- Jumbo and non conforming loans are loans above the maximum amount established by Fannie Mae and Freddie Mac. Usually, interest rates charged for jumbo and non-conforming loans are slightly higher than those of a conforming loan.
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