A conventional mortgage is one of the most popular debt instruments available to buyers wishing to purchase a home. So, here is what you need to know if you are considering getting a conventional mortgage to buy a home or refinance your existing home.
Defining Conventional Mortgages
A conventional mortgage is a homebuyer’s loan not offered or secured by a government entity. This type of loan comes from a non-governmental lender. A free-standing mortgage is offered through a private lender, such as a bank, credit union, or mortgage company.
Government-sponsored organizations guarantee some conventional mortgages. Namely, a home loan that Freddie Mac or Fannie Mae guarantees can still be considered a conventional mortgage. These organizations are government-sponsored, although they are not fully considered government entities.
How a Conventional Mortgage Works
Because a government agency does not fully secure conventional mortgages, they hold a higher level of risk for the lender. Mortgage rates for these loans can be higher than those secured by government organizations, even if Fannie Mae or Freddie Mac guarantees the loan.
With a conventional mortgage, homebuyers may be required to undergo a more stringent screening process. So, when applying for a mortgage, potential homebuyers must take the following steps:
- Fill out a mortgage application: The first step to applying for a conventional mortgage is to fill out an official application form with the lender. The application process begins when you are ready to be pre-approved for a mortgage.
- Submit to a background check: Background checks are required by lenders to ensure you are qualified to receive a mortgage. For a conventional mortgage, the background check will be thorough, including checking your credit history, credit score, consistency of income, and more.
- Provide supplementary documentation: The lender generally requests documentation to verify specific claims and information as part of the background check. In most situations, lenders will request documents that include evidence of assets, including funds for the down payment, proof of income, identification documents, and more. Cooperation with the lender helps to expedite the mortgage application process.
Conventional vs. Other Mortgages
Conventional mortgages are distinct from other types of mortgages. While there is some overlap in definitions of specific mortgage types, conventional mortgages are separate from conforming mortgages, government-secured mortgages, and other types.
A conforming mortgage is a mortgage that conforms to the standards set by the Federal Housing Finance Agency (FHFA). The most notable standard is the dollar limit of the loan. The FHFA sets a new dollar limit every year. Conforming loans must stay within the limit for a given year. Loans exceeding the limit are known as jumbo loans, which are almost always non-conforming.
In some cases, conventional mortgages are conforming mortgages. A conventional mortgage may sometimes fall into a conforming mortgage by fitting into FHFA requirements. However, not all conventional mortgages conform.
Fannie Mae and Freddie Mac are not able to purchase non-conforming loans. So, for a loan to be purchased by one of these government-sponsored organizations, it must be a conforming loan.
Government Secured Loans
Some government-secured mortgages are made available to qualified homebuyers. There are multiple versions of these loans at the national, state, and county levels. FHA loans and VA loans are examples of national government-secured mortgages available to select groups of homebuyers. Many U.S. states and counties have extensions of these loans or individual programs to suit the specific needs of the area.
In contrast, conventional mortgages are not secured by any government entities. There is no overlap in these mortgage types.
Interest Rates for Conventional Mortgages
Homebuyers should expect interest rates on some conventional mortgages to be higher than those for other types of mortgages, due to the increased risk inherent in conventional loans. Certain other options that may be available for secured mortgages may also not be available with a conventional loan, such as low or no down payment options.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.