A Conventional loan refers to a mortgage that follows the guidelines of government sponsored enterprises (GSEs) such as Fannie Mae or Freddie Mac but is not guaranteed or insured by the federal government.
Conventional mortgages can be classified as conforming or non-conforming. A conforming loan meets the parameters set forth by Fannie Mae or Freddie Mac while a non-conforming loan is one which exceeds the maximum loan limits established by these GSEs.
Conventional loans can be insured or uninsured. The insurance for conventional loans is referred to as Private Mortgage Insurance (PMI) and is a policy issued to provide protection to the lender in the event of financial loss due to a borrower’s default. Generally, a loan over 80% of the property’s value will require PMI insurance.
A strong credit history is a typical requirement for a conventional mortgage. Lenders tend to offer lower rates to borrowers who have clean credit histories and higher credit scores.
Conventional programs typically require a 5% down payment which must come from the borrower’s own funds. After this initial 5%, the remaining funds may be a gift to the homebuyer from a conventional allowable source. Gift funds that meet or exceed 20% of the property’s value do not require a minimum buyer contribution.
Conforming loan limits are set by Fannie Mae and Freddie Mac (GSEs) and are evaluated on an annual basis.
Purchase and refinance transactions are eligible for conventional loan programs.