A Conventional Loan is a mortgage loan that “is not” backed or insured by a government agency. For example FHA, VA and USDA are “not” Conventional Loans because they are government insured.When a Conventional Loan is “Conforming” it means that the loan conforms to the guidelines established by Fannie Mae and Freddie Mac.
Fannie and Freddie are called GSEs. That stands for Government Sponsored Enterprise. They set the guidelines under which Conforming Loans are underwritten. They also buy these Loans from the Lenders and sell them to Investors. So if you’ve ever wondered where mortgage money comes from….well it comes from Fannie Mae and Freddie Mac.
Conforming Loans can have down payments as little as 3%. And check this out: the 3% down payment can be money gifted to you by family. And they will allow the Seller to pay some or all of your closing costs, depending on your down payment %.
They typically require higher credit scores than the Government insured Loans. But in many cases they will require less documentation which can make for a quicker loan process. You can get fixed or adjustable interest rates and 30, 25, 20, 15 and 10 year terms.
These Conforming Loans are limited to a maximum loan amount of $453,100 or less in Delaware. It may be higher in other states. The rates on Conforming Loans are typically a bit higher than Government insured loans, but they carry on very strong advantage.
Conforming Loans do not require Mortgage Insurance when the loan is 80% or less of the Home’s value. So if you put 20% down on a Conforming Loan….you will not have MI. Even if you purchase a home with only 3% or 5% down, once your loan represents 80% or less of the home’s value, you can request to have the MI removed from your payment.
One huge plus is that Conforming Loans can be used to purchase or refinance any occupancy type. Government insured Loans like FHA, VA and USDA can ONLY be used to buy a primary residence.
However, Conforming Loans can be used to buy:
- Primary Residence
- Secondary/Vacation Residence
- Investment/Rental property
The following homes are eligible for Conforming financing:
- Single Family Home
- townhouse or row home
- condominium unit in a Fannie or Freddie approved project
- new construction. If working with a Builder, they may require Construction Financing in order to complete the home. Conforming loans can only be used to finance completed homes.
- modular home
- manufactured home with land on a permanent foundation
Please take some time to learn more about the Conforming Loan program and its many benefits right here on our site. If you have immediate questions, please contact us today.
Why choose a Conventional Loan?
Low Down Payment:
You can purchase a home with as little as 3% down! And that 3% can be a gift from your family. How cool is that?
Any Occupancy Type:
This is perhaps the greatest advantage of Conforming Loans. This loan can be used to purchase a primary home, a secondary/vacation home or an investment/rental property. Government insured loans can only be used to buy a primary residence.
Flexible Mortgage Insurance Options:
If you are able to put 20% down on a home purchase, you will not have to pay Mortgage Insurance. But if you have less money to work with for down payment, the Conforming Loan offers 2 great advantages. The first is that you can eventually eliminate the monthly MI payment once your loan balance is less than 80% of your home’s value. But here is another excellent option. You can take a slightly higher interest rate and the Lender will self insure the MI…thereby eliminating an MI payment. And even though your interest rate is higher, by removing the monthly MI your total payment will be lower than the previous option.
No Pre Payment Penalty:
Conforming Loans do not carry prepay penalties. So you have the flexibility to sell or refinance your home at any time without fear of being hit with some crazy fee for paying your loan off early.
Quicker Loan Process:
Because the Conforming Loans do require higher credit scores, often times there is less documentation required in getting your loan Approved and cleared to go to settlement. For example in some cases, the appraisal can be waived. You heard that correctly…the appraisal can be waived in certain scenarios. Typically this can happen with higher down payments.
Competitive Interest Rates and Terms:
Conforming Loans have low interest rates and offer both fixed rates and adjustable rates. A popular adjustable rate is the 7/1 ARM. The interest rate is lower than normal and it is fixed for 7 years. After 7 years it converts to an annually adjusting interest rate. Also Conforming Loans offer more term options….30, 25, 20, 15 and 10 year options.
Roll In Closing Costs:
The Conforming Loan will allow the Seller to actually agree to pay some or all of your closing costs. Typically closing costs will be 4.5% to 5% of the sale price. If you put 3 or 5% down, the Seller can contribute 3% of the Sale Price to pay your closing costs. With 10% or more down, the Seller can pay up to 6% of the Sale Price towards your closings.
Am I Eligable for a Conventional/Conforming Loan?
- 24 month consistent work history. Doesn’t have to be with the same Employer. If you were a full time student during this 24 month window…that is acceptable in lieu of working.
- Minimum middle credit score of 660 for any Borrower on the loan.
- No 30 day delinquencies on credit in the last 12 months.
- A rental history is typically not required.
- Savings is “not required” in most instances. Remember, your down payment can be a gift from family. However showing the ability to save money in the bank, IRA, 401k, pension or other investment accounts is a plus!
- If you have had a Bankruptcy, you must be 48 months from the date of discharge…..possibly 2 years under certain circumstances. And it is very important that you have re-established credit.
- If you have had a Foreclosure you must be as little as 3 years from the date the title of the home was taken out of your name….depending on certain circumstances. Otherwise it can be as much as 7 years wait time.
- If you have had a short sale, it can be as little as 3 years from the date of the sale.
- Collections will typically need to be paid off. However medical collections may be an exception.
- Secondary/Vacation homes require a minimum of 10% down.
- Investment/Rental homes require a minimum of 15% down.