Confusing mortgage terminology: what is a conventional mortgage, anyway?
If you spend any time reading about mortgages (it’s so much fun!), You will probably come across the term “conventional” loan. But what exactly is a conventional mortgage?
The Merriam-Webster dictionary is not much help. He defines “conventional” the way most of us do – either as adhering to “convention” or “lacking in originality or individuality.”
But most of us are not mortgage lenders.
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Conventional means “not supported by the government”
Many believe that the term “conventional” simply means an “ordinary” mortgage with no creative or risky bells and whistles.
But while many regular home loans are conventional, not all are. And many conventional loans have features like interest-only payments, very large loan amounts, or adjustable interest rates.
Conventional loans are simply those that are not guaranteed by the USDA, FHA, or VA.
Confusion: conventional versus compliant
One of the reasons for this confusion is the tendency of mortgage articles, even those of seasoned credit professionals, to use the terms “conventional” and “compliant” interchangeably.
“Compliant” loans can be seen as “simple” or even, as the dictionary puts it, unimaginative, as they must “conform” to guidelines set by Freddie Mac and Fannie Mae, the two entities that back or sell most. loans in the United States. .
What does “conform” mean?
In order to sell mortgages to investors, Fannie Mae and Freddie Mac buy them from lenders, aggregate them into large pools, and then sell shares in those pools. To do this, all loans in the pools must carry the same level of risk and have similar terms.
How do they make a bunch of loans to different people a reliable investment? By standardizing the terms of the loans they will buy from lenders. Because lenders must adhere to these guidelines to sell to Fannie or Freddie, the loans are called “compliant”.
Thus, all conforming loans are conventional, but not all conventional loans conform.
Non-compliant conventional real estate loans
Freddie Mac and Fannie Mae aren’t the only games in town when it comes to private real estate finance.
Lenders can make non-conforming mortgages as long as they keep them on their own books because they will be the losers if the loans fail. (These are often referred to as “portfolio” loans.)
Alternatively, lenders can sell these loans to investors who have set their own standards, which may differ from those of Fannie and Freddie.
These loans are not guaranteed by the government, so they are still conventional loans. However, their guidelines can range from very conservative to very innovative.
Conventional “non-conforming” loans can have almost any guideline that lenders want to set. So a lender can offer loans of up to $ 2 million with 10% down payment, but only to doctors with excellent credit. (Yes, this is an actual program.)
Jumbo non-conforming mortgages
One of the most common reasons a mortgage might go wrong is its amount. Fannie Mae and Freddie Mac limit the amount of mortgages they will buy. So, loans which are not compliant due to their size are called “jumbo” or even “super-jumbo”.
Compliant loan limits depend on the location of the property. They range from $ 548,250 to over $ 1 million in some “high cost” areas.
Non-conforming “non-prime” mortgages
Another subset of non-conforming mortgages is what is called subprime mortgages. These are loans that carry more risk for lenders than most programs. They include mortgages for people with a FICO score as low as 500, but there are also programs for people with great credit and special needs.
Non-senior mortgages include bank statement programs that verify borrowers’ income by analyzing the amount of money that goes through their bank accounts each month. This allows applicants whose tax returns do not show sufficient taxable income to prove their cash flow in another way.
(Loans with stated income, no income verification, and no documentation are illegal at the time of this writing. Borrowers must still prove that they can afford the payments of any granted mortgage.)
What it means when shopping for a mortgage
When shopping for a home loan, the type of mortgage loan matters for several reasons.
Non-conforming loans can vary widely in terms of rates and terms. It is therefore advantageous to shop around for them intensively to get the loan you want at the best rate.
Because their guidelines aren’t standard, you might be able to find something better for you than the no-frills compliant products – but you’ll have to look further.
Jumbo mortgages offer the opportunity to save more while shopping, as their rates vary and their amounts amplify the savings you make.
And non-bounties are the trickiest of all, as the market is extremely fragmented, guidelines range from “near compliant” to completely wackadoodle.
What are the mortgage rates today?
Current mortgage rates, whether government guaranteed or conventional, are still incredibly attractive. To find the best deal on the best loan for your situation, contact several lenders and compare the offers now.
Check your new rate (Sep 20, 2021)