Finance and Credit Professional

A conventional loan is essentially any type of lender agreement that is not fully protected by the FHA (the Federal Housing Administration) or fully backed by the Veterans Administration. Potential homebuyers who have at least 3% of the purchase price available to make as a down payment may be eligible for this most popular type of loan program.

Fixed Rate Loans

Several categories of conventional loans exist, the most common and familiar being the fixed rate mortgage. In the cases of fixed rate mortgages, the borrower will lock in an interest rate, and pay down both the principal and interest on the loan at that interest rate every month until the mortgage is paid off. The most typical term of a fixed rate loan is 30 years, though fixed rate mortgages can also be obtained for much shorter terms, the primary difference being in the size of the monthly mortgage payment.

Conforming Loans

Other conventional loans are known as conforming loans. In these cases, an arrangement is made between borrower and lender that comply with the stipulations of two federally run mortgage trading companies (or Government Sponsored Entities - GSEs) Fannie Mae (FNME) and or Freddie Mac (FHLMC).

Fannie Mae and Freddie Mac do not directly approve or deny loans. They buy and sell home mortgages, working with lenders to make home ownership easier for people to attain. Lenders like to sign up borrowers with conforming loan, because they can then sell these loans to Fannie May or Freddie Mac in order to more quickly receive the funds coming to them, and use those funds to make other investments. Fannie Mae and Freddie Mac, in turn, then repackage these loans to sell to investors as securities.

The current guidelines for a conventional Fannie Mae loan set a maximum purchase price for a single-family home at slightly above $415,000 (though residents of Alaska, Hawaii, or Guam may be able to qualify for an even larger loan).

The interest rate as well as the short- and long-term pricing on a conforming loan is determined primarily by the type of loan applied for. Also taken into consideration will be the amount of funds you already have to contribute to closing costs, your credit rating, credit score, and credit history, your employment history, and the type and location of the home in question.

Jumbo Loans

Other forms of conventional loans are nonconforming loan instruments that do not meet Fannie Mae or Freddie Mac loan qualifications, such as jumbo loans, or loans so large they fall outside the Fannie Mae and Freddie Mac loan limits (or purchase limits). Jumbo loans are provided by private investors and as such ordinarily come with much higher interest rates than conforming loans.

About The Author :

Somerset Mortgage Lenders has been in business since 1979. Whether you are looking to refinance your mortgage, consolidate your debt, improve your home, we can help. Call us toll-free at 1-800-675-9783 or visit us online.

Related News

Federal Reserve finds banks tightening standards on subprime mortgages (Pittsburgh Post-Gazette)
WASHINGTON -- A majority of the nation's banks have tightened lending standards on subprime mortgages, the Federal Reserve said today in a survey that provided further evidence of the spreading problems in mortgage lending. ...more

U.S. Credit Crunch Hits Globally (Valley News)
-- The turmoil in the U.S. credit markets turned global yesterday, prompting central banks in Europe and the United States to pump more than $150 billion into the financial system to keep it operating smoothly. ...more

Squeeze set to hit UK housing market (FT.com via Yahoo! News)
Fears that the credit squeeze will hit the housing market were reignited on Wednesday after a warning that rising borrowing costs are leaving banks struggling to find the money to fund new mortgages. ...more

Fitch May Downgrade Bonds Tied to Subprime Mortgages (New York Times)
Fitch Ratings said it might downgrade bonds valued at $7.1 billion due to rising delinquencies and defaults on subprime mortgages. ...more

Shaming of brokers who encourage house buyers to take on 'unrepayable' mortgages (Daily Mail)
Rogue mortgage brokers face being named, shamed and fined for their part in a home loan scam that threatens thousands with repossession. ...more