Conventional Loans

Conventional Home Loans and Mortgages

• Refinance up to 105% of appraised value with the new Fannie Mae DU Plus Program
• $417,000 mortgage loan limit
• Secured by government sponsored entities
• Purchase or refinance 1 to 4 family units

What is a Conventional Home Loan?

A conventional loan by definition is any mortgage which is not guaranteed or insured by the federal government. This type of loan was the first traditional mortgage loan made by local banks.  The loans were held by the bank in a portfolio until paid in full.  There are a number of advantages to a conventional loan, there are also some disadvantages.  Conventional loans generally require a larger down payment and have stricter debt to income ratio requirements. Conventional loans do not have an up front mortgage insurance premium due, but may have monthly private mortgage insurance if certain loan to value ratios are exceeded.

Fannie Mae and Freddie Mac purchase mortgages that conform to conventional loan limits, down payment requirements, debt to income ratios and other established underwriting guidelines.  Both Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government sponsored enterprises created by congress to purchase conforming mortgage loans and resell them on the secondary market.

Conventional Loans facts:

Conventional Home Loans Mortgages - HTML Version

What is a Conventional Mortgage Loan?

A conventional mortgage is a loan where real property like a fixed building or home is provided as collateral or security whose equity is reserved to be delivered to the lender in case the borrower defaults on repayment of the debt.  This is generally formalized in a mortgage note which documents the encumbrance of the fixed asset in exchange for the funds required to purchase the property.  A home buyer can get a conventional mortgage from a bank or mortgage lender or through intermediaries like a mortgage broker who will connect the borrower with a lender.

What are the Basics of Conventional Mortgages?

A conventional loan is defined by the basic tenets of:

• Principal - The total amount that is borrowed less any down payment funds.
• Interest - The additional amount paid per month in addition to any principal payment that is amortized over the life of the loan.
• Term - The number of months that payments will be made until the principal is repaid and the interest on the loan is satisfied.
• Payment -  The combination of a portion of the principal, interest, and any fees, insurance or other charges that are due in that month.
• Down Payment - The initial payment paid against the total loan amount that is deducted before the principal borrowed amount is calculated.

There are different ways that interest is applied to conventional mortgage loans including:

• Fixed Rate Conventional Mortgage - A mortgage loan where the periodic payment remains fixed for the life (or term) of the loan due to an unchanging annualized interest rate.  Most fixed rate mortgages have a 30 year term but there are many variations including the second most common, the 15 year fixed rate conventional mortgage.  While the principal and interest may not vary in a fixed rate conventional mortgage, other fees like property taxes and insurance premiums are likely to change over time.
• Adjustable Rate Conventional Mortgage - This loan type can have a fixed rate of interest for the first three to five years but eventually will begin to vary based on a major market index (such as the Prime Rate, the London Interbank Offered Rate - LIBOR, or the Treasury index or T-Bill). 

Paying Points on a Conventional Mortgage Loan

Where a borrower's financial situation indicates a higher risk than the normal standards for conventional mortgages, the lender may increase the interest rate by one or more "points" which increases the overall profitability of the loan and offsets the higher risk that the lender is assuming by lending to the borrower.

Using a Balloon or Bullet Payment with a Conventional Mortgage

There is another type of amortization used in a conventional loan where the number of payments are computed for a certain period of time (3 -5 years for example) but at the conclusion the balance of the outstanding principal is due for payment.  This is referred to as a balloon payment or a bullet payment.

Conventional mortgage loans are the most basic form of lending with commonly accepted levels of risk and values that are considered reasonable safe to the lender or "conventional" in their risk level.

Steps you can take right now:

• Apply for A Conventional Mortgage Loan
• Get a Rate Alert for a Conventional Mortgage Loan at First Option Mortgage
• Compute the Value of  Your Home for a Conventional Mortgage
• Find a First Option Mortgage or First Option Lending Location

Government Resources for Conventional Mortgages

• www.USA.gov - Mortgage for Homebuyers and Homeowners
• www.MakingHomeAffordable.gov - Making Homes Affordable Program (HAMP / HARP)
• www.FederalReserve.gov - Federal Reserve Website
• www.GinnieMae.gov - Government National Mortgage Association
• www.HUD.gov - Housing and Urban Development
• www.FannieMae.com - Fannie Mae HARP / HAMP Loan Lookup
• www.FreddieMac.com - Freddie Mac HARP / HAMP Loan Lookup

Consumer Handbook Conventional Home Loans Mortgages.pdf

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