What is a Conventional Mortgage?
Technically speaking, a conventional mortgage is any mortgage that is not backed by the government (i.e. FHA, VA, USDA).
When you hear the term conventional, it is typically referring to a mortgage that is securitized by Fannie Mae or Freddie Mac, although even jumbo mortgages are conventional. Another commonly used term for these loans is “conforming”, simply meaning that the mortgage conforms to the guidelines set forth by Fannie Mae or Freddie Mac. A jumbo mortgage while conventional, would not be considered conforming.
PrimeLending is a direct seller to both Fannie Mae and Freddie Mac and this is very important because it opens several doors for borrowers. While agency guidelines are similar in many respects, there are several differences that would allow a loan to be sold to one agency and not the other making one more advantageous than the other. Differences include, but are not limited to, loan-to-value on certain loan types, handling of student loan debt, maximum allowable debt ratios, paying off debt to qualify, and many others.
There are many types of conventional and conforming loans. A jumbo is any loan that exceeds the loan amount Fannie Mae and Freddie Mac securitize, which in the Minneapolis-St. Paul market is any loan exceeding $484,350. Fannie Mae and Freddie Mac currently have down payment options as low as 3%. Specialty loan programs include but are not limited to, renovation loans, loans that allow escrows for repairs, investment properties up to four units, second homes, multiple financed properties for borrowers who have mortgages on up to ten properties, first-time buyer programs, refinancing, cash-out refinancing, and more.
Both Fannie Mae and Freddie Mac utilize what is referred to as “risk-based” pricing. This is the reason that two borrowers may receive different interest rate quotes because things like credit score, down payment, property type, occupancy and more can impact the terms of your mortgage. The technical term for these adjustments is “LLPA” which stands for “Loan Level Price Adjustments,” and both Fannie Mae and Freddie Mac publish their LLPAs for all to see.
Fannie Mae and Freddie Mac currently have down payment options as low as 3%. When putting less than 20% down, conventional mortgages require PMI or Private Mortgage Insurance. PMI protects the lender in case of default by paying them back a portion of their losses. PMI is also risk-based with the factors used to determine premiums highest with the smallest down payments. As down payments increase, the factor used to determine the premiums decrease. PMI is also risk-based with borrower credit score. The higher the credit score, the lower the premium and vice-versa.