If you are in the market for a house purchase, you may be confused about the different types of mortgages on offer. In particular, you may have heard that conventional loans have increased in popularity since the financial crisis of 2007-2008, and have acquired a reputation for safety. However, it can still be difficult to know whether conventional loans are the best choice for people in your situation. Conventional loans are Fannie mae and Freddie mac conforming home loans and also investment loans at super competitive prices.
Conventional loans are home loans which are not backed or insured by the Federal government
– that is, they are non-GSE, or non-government sponsored entity, loans. This distinguishes them from government loans, or loans that are guaranteed or insured by the Federal government. Examples of government loans are FHA Loans or Federal Housing Association loans, or VA loans, which are guaranteed by the Department of Veteran Affairs. Most lenders originate both conventional loans and government loans.
Conventional loans can be either conforming or non-conforming.
If they are conforming, they meet the lending limits and underwriting guidelines of the two government sponsored entities, Freddie Mac, or Federal Home Loan Mortgage Corporation, and Fannie Mae, or Federal National Mortgage Corporation. Non-conforming loans are often called Jumbo mortgages, because they exceed the lending limit of $417,000, rising to $625.000 in some states.
There are certainly a number of advantages in taking out conventional loans, compared with FHA loans. One major advantage is that they present far fewer bureaucratic hurdles than FHA mortgages, which can take longer to process because of all the red tape. Conventional loans also have fewer stipulations and penalties, such as prepayment penalties for selling or refinancing. They can also be less costly, because they have zero or small mortgage premiums.
However, one big difficulty of conventional loans is that it can be much more difficult to qualify for them, because FHA loans come with a government guarantee. In fact, over the 12 months from September 2011 to September 2012, qualifying for conventional loans became increasingly difficult. The minimum FICO score is generally considered to be 620, but during that period the average successful applicant needed a FICO score of 764, which is above the nationwide median score of 711. In addition, the average LTV (loan to value) ratio required was 78 percent, meaning that a down payment of 22 percent was required, and the debt to income ratio required was 34 percent for total household debt. To get conventional loans with lower down payments, borrowers have often needed to have almost perfect credit scores, and also have had to accept high add-on fees and private insurance premiums.
However, since September 2012, there has been some evidence that these very strict requirements are being relaxed. At least two major banks have lowered their qualifying interest rate for conventional loans, and these lower rates have an impact on debt ratio calculations. This makes it easier for borrowers to qualify for variable loans, particularly the shorter-term conventional loans. Most analysts believe most other big banks are bound to follow by the end of 2012.
If you are uncertain about the merits of conventional loans, the best plan is to consult a mortgage broker. Generally, conventional loans are best suited to borrowers who have good or excellent credit, and who can afford a fairly substantial down payment. However, requirements are changing frequently, and a broker can advise you as to whether you qualify in the current market.
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