Complete Guide to Conventional Loans

Mortgages can be categorized as either government-backed or conventional loans. Two most popular types of government-backed mortgages are FHA loans and VA loans. Mortgages not guaranteed or insured by these agencies are known as conventional loans.

Conventional loans are further classified into:

1. Conforming loans
2. Non conforming loans
3. Jumbo loans
4. Portfolio loans
5. Alt-QM loans, aka sub-prime

Conforming Loans

After half of mortgage loans in the U.S. are bought by Fannie Mae and Freddie Mac, the biggest two government sponsored entities (GSE). In order to be marketable to those GSEs, conventional loan lenders have to conform to Fannie Mae and/or Freddie Mac guidelines. Thus, those conventional loans are called conforming loans. Current loan limit for single family residence is $417,000. For certain high-cost areas, loan limits may be allowed to a higher amount. Those are called high balance loans.

Non Conforming Loans

Those mortgage loans that are not conforming to GSE guidelines are known as non-conforming home loans.

Jumbo Loans

Those mortgages with higher loan amounts than the GSE loan limits are known as jumbo home loans.

Portfolio Loans

Majority of home loans originated by mortgage lenders are sold to investors in secondary market. Some lending institutions, however, keep certain loans in their own investment portfolio. So, those loans don’t have to follow those GSE or other investors’ guidelines. Those loans are called portfolio loans.

Alt-QM Loans

Some lenders market their loan products to borrowers with lower FICO score or spotted employment history. Those loans often comes with higher fees and/or interest rates.

Pros & Cons of Conventional Loans

Pros	Cons
Require at least 3% down payment Lender paid PMI available PMI can be dropped with 20% equity No funding fee or upfront mortgage insurance Lower monthly payment	Need 20% down to avoid PMI Often need 2 years employment history Need higher FICO score

Conventional loans are very popular among home buyers. With less fees and lower loan to value (LTV), conventional loans often yield lower monthly payment. If you are a US veteran, VA loan could be a better option. If credit score or down payment amount is your concern, look into FHA loans. If you need help deciding which loan is right for you, talk to our licensed mortgage loan originators. We will analyze your scenario and advice which loan product is better for you.