Conventional loans
Conventional loans are the most popular because they typically cost less than loans insured by the federal government. Usually, conventional loans are conforming loans, which means they meet the guidelines set by Fannie Mae and Freddie Mac, which are the companies that provide the backing for these loans, but they can also be non-conforming. Loan terms generally run between 30 and 15 years but can vary. The eligibility requirements for conventional loans tend to be more strict than those for government-backed loans such as VA, USDA, and FHA loans.
Some common conventional loans include:
Conforming loans
Conforming loans fall under the umbrella of conventional loans because they follow the guidelines created by Fannie Mae and Freddie Mac. Conforming loans work best for borrowers who meet the minimum credit scores, debt-to-income ratio, and maximum loan amounts set by the Federal Housing Finance Agency (FHFA).
Non-conforming loans
Non-conforming (portfolio loans) are loans that lenders keep in-house rather than selling on the secondary market. They are not required to follow the guidelines of Fannie and Freddie, so lenders can have flexibility with the terms to make qualification easier for specific borrowers.
Jumbo loans
Jumbo loans are non-conforming conventional loans because they exceed the maximum loan amounts set by the Federal Housing Finance Agency.
Fixed-rate mortgages
A Fixed Rate mortgage is the most popular loan choice because they have stable interest rates and fixed terms that will not change over the life of the loan. These loans are best for borrowers with a good credit score and larger down payment. Fixed-rate loans offer stability and predictability.
Adjustable-rate mortgages
Adjustable-rate mortgages (ARMs) have an interest rate that will change during the loan term, typically in response certain publicly published indices, such as US Treasury Bills, or the Prime Rate. They have a low introductory rate and will adjust based on the index and a margin decided upon when a borrower applies for this type of loan. Most ARMs start with the more attractive fixed rate for a set number of years- usually 3, 5, 7, or 10 years and then after that period has ended, the rate will adjust annually based on how the market fluctuates. Often, borrowers who anticipate higher income in the near future or aren’t planning on staying in their home for a long time will consider ARMs.
HomeReady by Fannie Mae
HomeReady by Fannie Mae is a conventional loan. The HomeReady has a low down payment mortgage option for creditworthy lower-income borrowers. It allows for a down payment as low as 3% of the home’s sale price. The funding source of the down payments is flexible with this program, allowing the funds to come from multiple sources, including gifts, grants, lenders, or other eligible entities, and Community Seconds with no minimum personal funds required. This loan can be used by First-time Homebuyers or repeat homebuyers who want to purchase or refinance a home. If the applicants are first-time homebuyers, they must take a homebuyer education course.
Home Possible financing by Freddie Mac
Home Possible 97% Financing by Freddie Mac is a loan program designed to help very low-to low-income borrowers attain the dream of owning a home. In addition to its down payment requirement of as little as 3% of the home’s sales price, Home Possible offers options to responsibly increase homeownership for more borrowers. For example, down payment and closing costs funds can come from gifts and various other sources, ownership of another property is permitted, non-occupying borrowers are allowed on one-unit properties, and rental income can be used for qualifying income.