Conventional loans encompass all mortgages that are not insured
by the Federal Housing Administration (FHA) or guaranteed
by the Veterans Administration (VA).
Conventional loans cover a wide variety of mortgage types that
fall into three major categories: conforming, jumbo, and
non-conforming.
Conforming loans are mortgages meeting the approval
guidelines of the two largest purchasers of home loans in the
country: the Federal National Mortgage Association (FNMA, or
Fannie Mae) or Federal Home Loan Mortgage Corporation (FHLMC or
Freddie Mac).
Fannie Mae and Freddie Mac set the standards for conventional
mortgage loans. These agencies do not make mortgage loans.
Instead, they create a market for mortgage lenders to sell loans
thus freeing up the capital to lend to other borrowers.
The mortgage loan criteria set by these agencies includes the
basic eligibility model for approval. These models cover such
areas:
credit history
employment stability & income
adequacy of funds to close
the property purchased or refinanced
the type of loan requested
It is important to note that there are many conventional loans
that use these guidelines although the loans will not be sold to
Fannie Mae or Freddie Mac. The most notable variations are
Jumbo
Mortgages and Adjustable Rate Mortgages
or (ARM's).
Most ARM's use agency credit guidelines for the approval
criteria. However, many ARM's have features that are outside
the eligibility requirements for Fannie Mae or Freddie Mac
(examples include higher loan amounts or loan-to-values).
Jumbo loans, as you might expect, are loans that are too
large to meet the eligibility requirements of either Fannie Mae
or Freddie Mac. Currently any loan over $333,700 is considered a
jumbo loan (as of December 2003). Generally jumbo loans have the
same basic approval requirements as conforming loans.
Non-conforming loans are mortgages that do not meet the
general approval guidelines of Fannie Mae or Freddie Mac. Typical
issues include credit profiles, employment profiles, or property
considerations.
When shopping for a new mortgage, the type of conventional loan
will have an impact on the interest rate that is quoted. Be sure
you get enough information to accurately determine the mortgage
that is best for you.
