What Is a Conventional Loan?
A conventional loan is a mortgage loan not insured by a government agency (i.e. FHA, VA or USDA). Most conventional loans are considered “conforming loans” because they are written according to guidelines set by Fannie Mae or Freddie Mac. The maximum conforming loan amount is $510,400 as of 2020.
Most conventional loan programs require 5% down. Buyers can obtain a conventional loan with 3% down through specific conventional loan programs designed to enhance affordable lending to creditworthy low to moderate income borrowers.
Fannie Mae
Fannie Mae is the name for the Federal National Mortgage Association (FNMA). It is a government-sponsored enterprise and a leading source of financing for mortgage lenders. They offer the traditional 30-year fixed-rate mortgage that is otherwise known as a conventional loan, along with other mortgage products. Fannie Mae provides underwriting guidelines on a nation-wide basis.
Fannie Mae HomeReady Mortgage
HomeReady is Fannie Mae’s 3% down mortgage program. It has expanded underwriting guidelines to allow more flexibility with down payment assistance in the form of gifts, grants, and second mortgages offered by public, nonprofit and employer funds to finance down payment and closing costs.
The program is offered through the California Housing Finance Authority, acting on behalf of the California Department of Housing. The program is known as Fannie Mae HFA Preferred in California. HFA stands for Housing Finance Authority. It offers fixed rate mortgages with terms between 15 and 30 years throughout most of California.
Freddie Mac
Freddie Mac is the commonly used name for the Federal Home Loan Mortgage Corporation (FHLMC), which is a government-sponsored enterprise created in 1970 to provide competition for the previously established Fannie Mae, and to further increase the availability of mortgages for home ownership in the United States. Freddie Mac also offers traditional conventional loan products with slight variations to its underwriting guidelines.
Freddie Mac Home Possible Advantage Mortgage
Home Possible Advantage is Freddie Mac’s 3% down mortgage program. It is intended to help first time homebuyers, military families, and low to moderate-income borrowers. The Home Possible Advantage mortgage program can also be combined with down payment assistance in the form of grants, gifts and approved second mortgages offered by public, nonprofit and employer funds to finance down payment and closing costs.
This 3% down conventional loan program is also offered as an option in California through the California HOME Plus loan program. It is a fixed rate loan with a term that wont exceed 30 years.
Why Choose a Conventional Loan?
A big advantage to conventional loans is the flexibility related to mortgage insurance. Private Mortgage Insurance (PMI) protects the lender against borrower default. Because PMI is risk-based, it can increase a homeowner’s monthly mortgage payments if they put less money down.
Most government loan programs require mortgage insurance. Conventional loans require mortgage insurance if down payments are less than 20%; however, buyers can waive this in future payments. If the value of a home increases, or a buyer has paid down the loan balance to accrue 20% equity, mortgage insurance can be removed. This is a result of the Homeowners Protection Act and applies to single family, owner-occupied homes. In fact, mortgage insurance automatically cancels at 78% loan-to-value if buyers are not delinquent on their home.
Waiting Periods – Conventional Loans
Below are the standard conventional loan waiting periods for major derogatory credit events.
- Conventional loans after bankruptcy: The waiting period for getting a conventional loan after a chapter 7 bankruptcy is 4 years. The waiting period for getting a conventional loan after a chapter 13 bankruptcy is 2 years.
- Conventional loans after foreclosure: The waiting period for getting a conventional loan after a foreclosure is 7 years after the foreclosure.
- Conventional loans after short sale: The waiting period for getting an USDA loan after a short sale is 4 years.
