Conventional loans can be fixed rate mortgages, adjustable rate mortgages, balloon mortgages, or hybrid loans. Almost any type of loan that you take, if not issued by a government entity, is considered a conventional loan.
Conforming loans follow the terms and conditions set by Fannie Mae and Freddie Mac. The 2009 conforming loan limits remain at the limits set in 2006, 2007 and 2008. These guidelines put the maximum price for a first mortgage at $417,000 for a single-family dwelling.
Nonconforming loans do not meet Fannie Mae or Freddie Mac guidelines, but they are also considered conventional. Jumbo loans are one example of a conventional loan that does not meet Fannie Mae or Freddie Mac guidelines. A jumbo loan is a loan with a dollar value above the maximum loan amount established by Fannie or Freddie. Jumbo loans usually have a higher interest rate. Any mortgage loan over $417,000 would be considered a jumbo loan.
To be eligible for an conventional mortgage, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (28% ratio). Your credit is equally important. At least a 620 FICO credit score is generally required to obtain a conventional approval. You must also have enough income to pay your housing costs plus all additional monthly debt (36% ratio). There are some exceptions to the requirements.
Down Payment Requirements
Conventional Loans require the home buyer to invest a minimum of 5% – 20% of the sales price for the down payment and closing costs. As an example, if the sales price is $100,000, the home buyer must invest at least $5,000 – $20,000.
Seller Assistance in Buyer’s Closing Cost
In some circumstances, a seller may agree to pay a buyer’s closing cost or a portion there of. When a buyer’s down payment is less than 10% of the purchase price, a seller may contribute up to 3% of the loan amount towards the buyer’s closing costs. Additionally, if the buyer’s down payment is greater than 10%, a seller may contribute up to 6% of the loan amount towards the buyer’s closing costs. Circumstances in which the buyer is purchasing the home as an investment property, the seller may only contribute up to 2% of the loan amount towards buyer’s closing cost regardless of the down payment.
A conventional loan is any mortgage that is not guaranteed or insured by the federal government. A conventional loan is generally referring to a mortgage loan that follows the guidelines of government sponsored enterprises (GSE’s) like Fannie Mae or Freddie Mac. Conventional loans may be either “conforming” or “non-conforming.”