What is considered a conventional/conforming loan?
Starting in 2019, loan limits for conventional mortgages will rise to a maximum of $484,350. These types of loans are ones that are available for purchase by Fannie Mae and Freddie Mac and meet their guidelines. Products are limited to fixed rate and adjustable rate loans and do not allow interest only or negative amortization. Fannie Mae and Freddie Mac provide stability and affordability to the mortgage market by buying “conforming” mortgages from lenders, which gives lenders liquidity to make more mortgages.
Credit qualifications and underwriting guidelines can be a little more rigid on a conventional loan and require a down payment of at least 20% to avoid mortgage insurance. Fannie and Freddie loans will not allow you to finance closing costs, however these costs can be offset or covered by a lender or seller credit. When offering on a new home, you may request a seller concession of up to 3% of the purchase price to reduce these costs. Conventional loan programs require a minimum 5% down in order to utilize seller credits.
- Minimum down payment for a conforming loan is 3%.
- 20% down payment is required to avoid mortgage insurance.
- No upfront mortgage insurance.
- Tougher underwriting guidelines are rewarded with premium rates.
- Fixed terms include: 10 year, 15 year, 20 year, 25 year and 30 year options.
- Adjustable rate loans (ARMS) are available at 3, 5, 7, and 10 year terms.
- Additional education is required for ARM loans.
- Conventional /Conforming loan qualifying ratio
- A debt-to-income ratio (DTI) factors in your application income, then divides it by your total house payment (front end ratio) and then all of your combined debt (back end ratio).
- Conforming guidelines allow for 31% on the front end, and 43% on the back end.
- Compensating factors such as good credit, higher down payments, and job history, will allow these numbers to rise giving you more purchase power.
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Disclaimer: The information contained in this article has been prepared by an independent third party and is distributed to consumers for educational purposes only. The information is considered reliable but not guaranteed to be accurate. The opinions expressed in this article do not represent the opinions of Finance of America. Please consult with a licensed loan officer for expert advice regarding financing or refinancing a home.