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Conventional Loans

What is a Conventional Loan?

A conventional loan is a mortgage loan that is not guaranteed or insured by any government agency. It is typically fixed in its terms and rate. About half of all conventional loans are also known as conforming loans, since they conform to a set of standards set by Fannie Mae and Freddie Mac

Freddie Mac and Fannie Mae are organizations that are a part of the secondary mortgage market. Second mortgage market organizations buy pools of mortgages from primary lenders and sell securities by these pooled mortgages to investors.

The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a public government-sponsored enterprise (GSE), headquartered in the Tyson’s Corner CDP in Fairfax County, Virginia. Freddie Mac buys mortgages and pools them, selling bonds backed by the mortgages in the open market. 

The Federal National Mortgage Association (FNMA), known as Fannie Mae, is a United States government-sponsored enterprise (GSE). Fannie Mae’s purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities. 

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DEBT TO INCOME RATIO (DTI)

The lenders will take this into consideration when you apply for a conventional loan. Debt to Income (DTI) Ratio varies between 40-50% (depends on the lender) buy typically it is 43%. Example: If your gross annual income is $80,000 and…

  1. Monthly liabilities: $2,500
  2. Monthly Gross Income: $6,666
  3. DTI: 38% ($2,500/$6,666)

So as you consider your lending options, take note how much debt you currently have.

*These are just the basics, each lender will have certain DTI requirements. Consult a mortgage lender for your specific situation.

CREDIT

Credit: Must have a Good to Excellent Credit Score to qualify for the best interest rates. Most lenders will require the borrower to have at least a FICO credit score of 620 to obtain approval.

FICO Credit Score: Fair Issac Corporation (FICO) credit score ranges from 300-850. The higher your score, the more likely you will qualify for the lowest interest rates. FICO gives its formula to the three credit bureaus—Equifax, Experian, and TransUnion—and they apply the math to your credit reports.

DOWN PAYMENTS

Down payments: Can be as low as 3% (97% loan-to-value option), but typically between 5-20% for a down payment. Note: For down payments <20%, lenders will typically require you to have a FICO credit score greater than 700.

Note: If your down payment is less than 20%, you will have to pay for mortgage insurance (Private Mortgage Insurance – PMI). This policy protects the lender from losing money if you end up in foreclosure. The lender must cancel PMI when your outstanding loan balance drops to 78% of the home’s original value. You can request from the lender to drop it when your loan balance reaches 80% of the home’s original value



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