What Is a Conventional Mortgage Loan?

December 10, 2010 11 Comments »

conventional loan

Mortgage Q&A: “What is a conventional mortgage loan?”

A “conventional mortgage” simply refers to any mortgage loan that is not insured or guaranteed by the federal government.

The word conventional means standard, regular, or normal, which is basically saying that conventional loans are typical and common.

And that makes a lot of sense because conventional loans make up the largest share of mortgages issued in the United States.

Their counterpart, government loans, account for the rest, albeit a smaller slice of the pie.

Types of Conventional Mortgages

As you might suspect, conventional mortgage loans can be both fixed mortgages or adjustable-rate mortgages, including hybrid ARMs.

Additionally, these types of loans may be conforming or non-conforming, with the former meeting the standards set forth by government-sponsored enterprises Fannie Mae and Freddie Mac.

Be careful not to confuse conventional with conforming, as the two terms are very different. However, neither are considered government loans, despite the fact that Fannie and Freddie are now basically in government control.

One major factor that determines whether a mortgage is conforming or not is the loan amount – loans over the conforming loan limit are considered jumbo mortgages and will often come with a higher mortgage rate as a result. Still, both types of loans are considered conventional because they aren’t government loans.

Additionally, conforming loans have a minimum credit score requirement of 620 and tend to have a max loan-to-value ratio (LTV) of 97%, whereas non-conforming conventional loans may allow lower credit scores and higher LTVs.

Fannie Mae’s Homepath is a popular conforming loan program that allows LTVs of up to 97%.

These days, conventional mortgages (whether conforming or not) typically have larger down payment and higher credit score requirements than government loans, and if the LTV exceeds 80 percent on a conventional loan, private mortgage insurance is required by the mortgage lender.

However, conventional mortgages may provide more flexibility because banks can set their own underwriting guidelines and risk appetite, instead of being at the mercy of rigid government guidelines.

For example, if a conventional lender wants to approve mortgages with 500 credit scores, or with zero down, they can, assuming they’re willing to take such risks.

Government Loans Are Not Conventional Loans

Now let’s turn our attention to mortgage loans that are backed by the federal government, referred to as “government loans,” or “govie loans” for short. These are considered non-conventional because they’re government-backed. End of story.

The most popular of the government loans is the FHA loan, which is a mortgage backed by the Federal Housing Administration (FHA), an arm of the Department of Housing and Urban Development’s (HUD) Office of Housing.

FHA loans allow for down payments as low as 3.5 percent, but mortgage insurance is also required, even if the LTV is below 80%.  The FHA surged in popularity after the mortgage crisis all but wiped out subprime lending thanks to its low down payment and lenient credit score requirements.

In fact, many suggest that FHA lending essentially replaced subprime lending, though during the boom, it was quite the opposite. Nobody was interested in government loans because private, conventional lenders had the most attractive (yet risky) loan programs.

Another common and widely used government loan is the VA loan, which is backed by the Department of Veteran Affairs. As the name implies, it is reserved for military and their families, unlike the FHA, which any individual can use.

Lastly, there is the USDA home loan program, which provides 100 percent financing on purchase mortgages to borrowers in rural neighborhoods throughout the country.  In that sense, it has a limited reach as well, making FHA loans the king of the govie loans.

For the record, most mortgage lenders originate both conventional mortgage loans and government loans, though the government-share has increased markedly since the mortgage crisis got underway. That’s because lenders like having an explicit government guarantee (in the way of insurance) if things go south again.

However, as time goes by and things normalize, expect conventional mortgages to regain market share.  This is especially true now that the FHA is increasing mortgage insurance premiums to shore up capital and avoid a government bailout.

If you’re shopping for a mortgage, be sure you know the distinction between these loan types. One may be better suited for you for one reason or another, and it’s always good to know all your options.

11 Comments

  1. Raymond Clifford November 15, 2015 at 6:47 am -

    I have a conventional loan with BBT, can you tell me why they do not have an amortization schedule. When I closed my loan it was in the middle of the month which resulted in my first payment being about 46 days out and added a month to my 15 year refinance. How can I tell how much time (money, months) I have reduced my mortgage as I pay a little extra every month.
    Raymond Clifford

  2. Colin Robertson November 19, 2015 at 9:51 am -

    Raymond,

    You should be able to login to their website and track payments and see your payment schedule. But you might need to use a calculator from a third-party site to see the effect of those extra payments as they might not display such information themselves.

  3. james baker December 11, 2015 at 11:40 am -

    I m in a conventional loan and my mortgage is upside down the loan is more than the value of my home, is there any programs that can get me out of this situation. thanks for your response

  4. Colin Robertson December 11, 2015 at 1:55 pm -

    James,

    If owned by Fannie/Freddie there is HARP, which allows you to refinance if underwater with any lender that offers the product. If not owned by those two, your loan servicer may have a proprietary modification program to lower your rate. You’ll have to inquire with them directly if it’s the latter.

  5. JB January 22, 2016 at 9:11 am -

    +RayClifford, Collin is correct. I have a mortgage with BB&T and I simply login to their website and the amortization calculator is right there. It does include extra payment options to let you play with the numbers and it adjusts the amortization table for you as well.

  6. Susan Boss February 22, 2017 at 8:27 am -

    My loan is conventional thru BOA and the mortgage is higher then the value of home, Connecticut. My husband has dementia and no longer working, what is my best way to go about lowing the payment? He is a veteran also.

  7. Colin Robertson February 23, 2017 at 10:11 am -

    Susan,

    May want to see if it’s backed by Fannie/Freddie to see about getting a HARP refinance. If not, you could inquire with BOA directly about their own proprietary (in-house) loan mod options, while perhaps also mentioning your situation and the fact that your husband is a vet. Good luck.

  8. TB April 18, 2017 at 12:40 pm -

    I have a client who is in a FED GOVERNMENT PLAN CONVENTIONAL REAL ESTATE MORTGAGE as of 2010. Bought the home in 2003. This is a 568 term. and matures in Jan 1 2050.

    In Jan 2017 the loan was backed by freddie. That same month loan was sold to SPS and now reads as mentioned above, no longer backed by Freddie Mac. I am confused as to why the loan was simply transfered and not being reported as backed by Freddie any longer. Client needs streamline to help with income issues as her husband has just passed.

    What advice do you have for this situation?

  9. Colin Robertson April 18, 2017 at 6:27 pm -

    TB,

    May want to reach out to Select Portfolio Servicing, Inc. (if that’s what SPS stands for) to determine what happened and if Freddie Mac still backs the loan.

  10. Susan Lopez June 13, 2017 at 8:25 pm -

    Can conventional loans be assumed ?? My husbands ex is 13 years of paying on her own. She is ruining our credit. She was court ordered to refinance it but it’s a conventional loan that just got bought by Fay Financial. They told us it cant be assumed and thats what she said she was able to do. But they told us they don’t do loan assumptions. She wants him to sign off on the property deed. He wants his name off finance title 1’st.

  11. Colin Robertson June 19, 2017 at 9:34 pm -

    Susan,

    Generally, conventional loans are not assumable. Might be able to remove him from the deed and the loan during the refi if that’s what all parties want.

Leave A Response