Borrowers are constantly bombarded with a slew of various terms when shopping for a mortgage – fixed rate, adjustable rate, equity, principle, closing costs, title company fees, Fannie Mae, Freddie Mac, traditional loans, and FHA loans. It can become quite confusing, especially to a first-time borrower. So what is a conventional loan?
A conventional loan, by definition, is any mortgage not guaranteed or insured by the federal government. So, if no government agency backs your loan, it’s considered a conventional loan. Conventional loans can be either “conforming” or “non-conforming”, although conventional loan requirements generally conform to national guidelines set by Fannie Mae and Freddie Mac.
To put it another way, a conventional loan is any bank’s standard mortgage offer with established terms and regulations; whereas an FHA loan has somewhat more flexibility. For a conventional loan, the borrower benefits from a quicker time to closing as well as usually lower mortgage insurance premiums, and in some cases, no mortgage insurance is required.
There are several benefits of a conventional loan:
There are also some potential disadvantages of a conventional loan to be aware of:
You’ll hear these names a lot when shopping for a mortgage. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that buy mortgages from lenders and package them into securities. They’re also the two biggest sources of financing for conventional loans.
Fannie Mae was created in 1938 to help stimulate the housing market by making it easier for people to get mortgages. Freddie Mac was created in 1970 as a sister organization to Fannie Mae. Both organizations are now under the direction of the Federal Housing Finance Agency (FHFA).
The main difference between Fannie Mae and Freddie Mac is that Fannie Mae buys loans from commercial banks, while Freddie Mac buys them from smaller thrift institutions. Fannie Mae and Freddie Mac package these loans into securities and then sell them to investors on the open market. By doing this, they help provide liquidity to the mortgage market.
Fannie Mae and Freddie Mac also have different requirements for the types of loans they will back. For example, Fannie Mae only backs loans with fixed interest rates, while Freddie Mac backs both fixed-rate and adjustable-rate mortgages.
The process of applying for a conventional loan is similar to the application process for any other type of mortgage. You’ll need to provide basic information about yourself and your financial situation, including:
You’ll also need to provide information about the property you’re looking to purchase, including:
Once you’ve gathered all of this information, you’ll need to submit it to a lender of your choice. The lender will then review your information and determine whether or not you’re eligible for a loan. If you are, they’ll provide you with a loan estimate that outlines the terms of the loan.
Once you’ve received a loan estimate, you can compare the terms of different loans and choose the one that’s right for you. Once you’ve chosen a loan, you’ll need to complete a formal application and submit it to the lender.
If you’re approved for the loan, you’ll then need to go through the process of closing on the loan. This involves signing a number of documents and paying any closing costs. Once you’ve closed on the loan, the lender will provide you with the funds to purchase the property.
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