What is a Conventional Loan?

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A conventional mortgage loan is a mortgage loan that is not backed by a government agency. Conventional mortgage loans can be categorized in many different ways, including conforming v.s. non-conforming, fixed-rate v.s. adjustable-rate, and more.

Conventional mortgage loans are great for potential property buyers who don’t meet the requirements for other mortgage types, such as debt-to-income ratio or credit score. Since conventional loans are backed by private financial institutions instead of government agencies, they don’t always have to follow the strict regulations set in place by government officials. Depending on the buyer’s current financial situation and intended use of the property, a conventional loan may offer a lower interest rate and more favorable terms than a government-backed loan.

Conventional mortgage loans come in several varieties, which can overlap, including:

  • Conforming

Conforming conventional mortgage loans is best for borrowers with excellent credit scores and debt-to-income ratios. Conforming loans, while not “government-backed” per se, must follow all lending rules set forth by the Federal Housing Finance Agency (FHFA), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). 

Why would a bank want to deal with a quasi-government agency when issuing mortgage loans? By following Fannie Mae and Freddie Mac’s regulations, those agencies agree to insure the mortgage amounts for the banks issuing them. The agencies also act as a secondary market if the bank or financial institution issuing the mortgage wants to sell it later.

  • Portfolio

Mortgages that meet Fannie Mae and Freddie Mac standards that the issuer does not intend to sell on the secondary market are known as portfolio conventional mortgage loans. Mortgage issuers have more flexibility with credit scores and other financial status indicators with portfolio loans, but they usually have higher interest rates and don’t have the same consumer protections as a conforming loan.

  • Subprime

If your credit score is below 620, or your debt-to-income ratio is higher than 50%, you won’t qualify for a conforming conventional mortgage loan. Instead, you’ll be offered what’s known as a subprime loan, which is a non-conforming mortgage loan with high closing costs and interest rates. While the terms are usually not superb, these loans are essential for borrowers with poor credit who need safe housing.

  • Jumbo

If you need to borrow more than a conforming conventional mortgage loan allows, a jumbo conventional mortgage loan might be a better fit for you. Jumbo conventional mortgage loans usually require outstanding credit, a large down payment, and a very low debt-to-income ratio. Even with all these in place, jumbo loans typically have higher interest rates and less favorable terms since they present a large risk to the mortgage issuer and don’t qualify for insurance protection.

  • Amortized

Almost all mortgage loans are amortized, which simply means that monthly payments include both principal and interest, and there is no balloon principal payment at the end of the loan. You will be given a mortgage amortization schedule by your lender when opening your mortgage loan, which will detail exactly how much of each payment is applied to interest and how much is applied to the principal.

Non-amortized mortgage loans are special situations where only interest, or nothing at all, is required to be paid over the life of the loan. At the end of the loan, however, all principal and any unpaid interest is due. Non-amortized mortgage loans are often used by property developers to offset initial building costs and by retailers to offer deferred payment financing for consumer goods.

  • Fixed-rate

Fixed-rate mortgages are simply mortgage loans with interest rates that do not change over the life of the loan, regardless of the behavior of the housing market. Fixed-rate mortgages can be for any length of time, although they are most commonly for 30 years.

  • Adjustable-rate

Adjustable-rate conventional mortgage loans have an interest rate that is set for a certain amount of time, usually three to 10 years, and then fluctuates each year thereafter with the prevailing housing market. For borrowers who don’t intend to keep the property long-term, adjustable-rate mortgages can offer lower rates and more incentive to sell.

If you’re purchasing a new property or considering a refinance and think a conventional mortgage is the best way to go, the real estate experts at Benefit Title Services in Tampa have the experience and resources necessary to complete your transaction smoothly and cost-effectively. We’ve helped customers all over Florida purchase or refinance their properties for great interest rates, favorable loan terms, or to pull out home equity in cash for major expenses! Call us at (813) 251-1420 or contact us online to discuss your specific refinance needs today.