Conventional Loan
Early mortgage programs required that a borrower make a down payment of up to 50% of the purchase price. The minimum amount of down payment required eventually eased and settled in at 20% which was the highest level of risk a bank was willing to take (80% exposure in case of failure on the part of the owner). To spur home purchase in the post-depression 1930’s the Federal Government formed the Federal Housing Authority (“FHA”) which provided loans for low-to moderate families and only requiring a minimum down payment. How? Through the initiation of a Government backed Mortgage Insurance. Since that time Private Mortgage Insurance companies formed which were willing to insure Bank-offered loans; this in turn allowed Banks to offer mortgages with less than 20% down payment – this is the advent of today’s Conventional Loan.
While banks, Savings & Loans and Credit Unions still offer loans from their own Depositor’s funds (“Portfolio Loans”), the bulk of today’s Conventional loans are owned by two Government Sponsored Enterprises (“GSEs”): “Fannie Mae”, or Federal National Mortgage Association, and “Freddie Mac”, Federal Home Loan Mortgage Corporation. These two corporations were created by the federal government to buy, package and securitize (aka “sells” on the secondary market) from various third party ORIGINATORS. Together these GES’s set both the maximum loan amount and program requirements for borrowers.
Usually, a conventional loan is a 30-year fixed rate mortgage meaning it has a fixed interest rate for the 30 year life of the loan. However there are variations such as 25, 20, 15 and 10-year fixed rate terms. However there are also Adjustable Rate Mortgages (“ARMS”) available where there is a fixed rate for a defined period at which time the rate will adjust periodically through the remaining life of the loan. For example a 5/1 ARM has a fixed rate for the first 5 years which then adjusts every year thereafter depending on market conditions. All ARMS are based upon a 30-year term but variations include 1-year, 3/1, 5/1, 7/1 and 10/1. The trade-off of an ARM worthy of careful consideration is “you get a lower start rate for excepting the risk of where rates WILL be in the future”. Depending on your plans and goals, ARMs can be VERY useful programs if understood and applied wisely.
Currently the maximum loan amount offered by Fannie or Freddie $417,000. Loan amounts within this limit are referred to as “Conforming loans” while loan amounts ABOVE this limit are referred to as “Non-Conforming” or Jumbo loans. There are several other key points that can cause a loan to be labeled as “Non-Conforming” such as, but not limited to, type of home, employments, source of funds, etc. This is a topic for more discussion with your Licensed Mortgage Professional.
Conforming Conventional loans can have better interest rates than non-conventional loans and can be a great option for those with a 20 percent down payment. However, even if the borrower does not have a 20 percent down payment, it is still possible to get a mortgage. By putting less down and accepting a possibly higher interest rate, the borrower can still get financing through a non-conventional loan.
Back to Conventional loans, any time a down payment of LESS than 20% is being made a Borrower will either need to incorporate Private Mortgage Insurance (PMI) –or- a 2nd mortgage for the balance above 80% loan-to-value. Since the melt down of the mortgage market in 2007 availability of 2nd mortgages is scarce but still possible in some markets. There are ways to finance the cost of the PMI all options of which should be discussed with your Licensed Mortgage Professional.
Conventional loans are generally available for the purchase of the following categories of ownership:
Primary Residence 5% minimum down payment with PMI
Second (Vacation) home 10% minimum down payment with PMI
Investment properties (no PMI currently available)
1 unit 20% minimum down payment
2 units 25% minimum down payment
3-4 units 25-30% minimum down payment
There are loan options available to buyers of multi-unit properties (2-4 units) where the owner will occupy 1 unit as their Primary Residence. Programs vary by Lender.
Like most things in the current Real Estate and Mortgage Markets, things change daily. The best way to be certain is to contact and stay in touch with a Licensed Mortgage Professional!