Conventional Mortgage Loan Programs
A conventional mortgage loan is a “conforming” loan, which simply means that it meets the requirements for Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase mortgages from lenders and sell them to investors.
If you’re unable to make a large payment upfront, conventional loans are available with a down payment as low as 3%.
In most cases, borrowers save money in the long run with a conventional loan because there’s no upfront mortgage insurance fee, and the monthly insurance payments are cheaper.
What Is a Conventional Loan?
A conventional loan is not backed by the federal government; rather, it is issued by a private lender, such as a bank, credit union or other financial institution. It typically has stricter credit requirements than a government-backed loan. That’s because the lender takes on more risk without a guarantee from a government agency if a borrower cannot pay.
Conventional loans fall into two categories: conforming or nonconforming.
- A confirming loan meets the requirements to be sold to Fannie Mae or Freddie Mac, the government-backed housing finance giants that buy mortgages from lenders and sell them to investors. Conforming loans must not exceed loan limits set by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. If you want a one-unit property, that amount in 2021 for most of the United States is $548,250 and $822,375 in high-cost areas.
- A nonconforming loan fails to meet the criteria for purchase by Fannie or Freddie. A jumbo loan, for instance, is nonconforming because it exceeds the loan limits set by the FHFA.
In the meantime, the lender will appraise the property to determine its value. You may also schedule a home inspection to identify any major problems before closing.