Conventional Loans

New HomeWe hear the term CONVENTIONAL LOANS  all the time but what is it?   How is it different from other types of loans?  The main difference is that a conventional loan is not made by a government entity nor insured by a government entity…..a non GSE loan (non-government sponsored entity).  However, most lending institutions follow the guidelines of government sponsored enterprises (GSE’s) such as Fannie Mae or Freddie Mac as both Fannie and Freddie are stockholder-owned corporations and are not part of the federal government.  Similar guidelines make it easier to sell the loans in the secondary market.

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which Features of mortgage loans such as the loan size, maturity, interest rate and other characteristics can vary considerably depending on the state, borrower’s credit profile, down payment, etc… For this reason, it is difficult to blindly quote a rate when someone calls without going through the application process.

Home ownership is a big commitment but it is also THE AMERICAN DREAM for many and no other country encourages home ownership more and provides financing vehicles to do so than in the United States. The word mortgage is a French Law term meaning “death contract” meaning that the pledge ends or dies when the obligation is fulfilled.  Let not the etymology of the word scare you because financing vehicles for home ownership could not be more attractive.  In most cases, home ownership is less expensive for many Americans due to low rates and tax incentives.

There are many types of mortgages used worldwide, but several factors BROADLY define the characteristics of the mortgage.  All these may be subject to local & federal regulations and legal requirements.

  1. Interest:  Interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods.
  2. Term:  Mortgage loans generally have a maximum term…..the number of years after which the loan will be repaid. The most commonly known and used loan terms are the 30, 20 or the 15 year fixed loans.  At Great Hills Lending Group, we offer amortization terms anywhere from 8-30 years.  If you desire an 18 year mortgage, it can be done.
  3. Payment amount and frequency:  On FIXED terms, the amount you pay on principal and interest stays the same each month for the life of the loan.  In some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
  4. Prepayment:  Many loan programs in the U.S. do not have prepayment penalties but there are some types of mortgages that may limit or restrict prepayment of all or portion of the loan.

Types of Conventional Loans

Conventional loans may be conforming (follow the terms and conditions set by Fannie & Freddie with a loan limit) and non-conforming.

The two basic types of amortized loans are the fixed rate mortgage and adjustable-rate mortgage (variable rate).  In the United States, fixed rate mortgages are the norm but variable rate mortgages are also relatively common and likely to be more so during times when interest rates are high.  Combinations of fixed and floating rate mortgages are also common where a mortgage loan will have a fixed rate for some period then vary after the end of that period.  Some programs are more complex than others so it is very important for you to consult a professional who can GUIDE and EDUCATE you through the process.

Often times, a borrower’s eligibility for a loan program is determined by the individual’s credit profile, employment history, and assets among other variables.  In a nutshell, the underwriting process is to determine your ability to repay a loan and to determine the risk level.  This does not mean you cannot buy because you had a foreclosure in the past or filed bankruptcy.  Much of this will depend on what you have done to rebuild your credit history and how much time has passed since the foreclosure or discharge date.

To obtain a conventional loan, lenders usually require that the borrower make a down payment toward the purchase.  This is the borrower’s financial contribution towards the purchase of a home where the typical minimum down payment is 5%.  Although conventional loans can be obtained with 3% down, it is very difficult or near impossible to truly get someone approved unless mortgage insurance can be obtained.  The 100% conventional loan programs that were once very popular are no longer available. Please look under the USDA and VA sections for more information on 100% financing programs.  Great Hills Lending Group offers a variety of programs so it is best to call for a free personalized consultation.