Conventional Loan Types to Fund Your Dream Home

A conventional loan, which is most popular among homebuyers for home financing, comes in more than one flavor.

Conventional loan types enjoy a reputation of being a safe option for mortgages.

Since a conventional loan is not made by, backed by, secured by, or insured by the government, the private lender will determine the criteria by which a borrower can be approved. Private lenders include banks, credit unions, and mortgage companies.

Read on to learn about conventional loan types, how they work, and what their differences might mean for you as you compare lenders and mortgage options.

Conventional Mortgages from Mortgage Lenders

Although conventional home loan doesn’t have many of the perks that government-insured loans (FHA loans, VA loans, and USDA loans) provide, it can offer the best interest rate and the lowest fees if you meet certain criteria like a high credit score (more than 700) and you can give a 20% down payment.

To help you decide whether conventional loans are a better fit for you and your financial situation, let’s study the conventional loan types which reflect different criteria and requirements as well.

Details on the Common Conventional Loan Types

In today’s mortgage market, conventional mortgages account for more than half of all mortgage loans made according to Mortgage Reports.

This makes conventional loans the most prevalent type of loan provided by mortgage lenders in different types:

1. Conforming conventional loans

   These loans have maximum amounts that are set by the government or by Fannie Mae or Freddie Mac, companies that provide backing and additional standards for conforming conventional loans.

   They are available in two forms:

   • Conventional Conforming Loan

     This is the most common type of loan with the following general features:

     • Average loan limit in most counties: $484, 350
     • Borrowers from high-cost counties can loan as much as $726, 525
     • Mortgage insurance: required if your down payment is less than 20%

   • Jumbo Conforming Loan

     • Loan limit: higher than $484,350
     • Only available in certain counties: check out mortgage lenders
     • The maximum loan amount varies by county: to check the loan limit in your location, use HUD’s (Department of Housing and Urban Development) tool.

2. Non-Conforming

   Mortgage lenders determine the eligibility, pricing, and features of these loans that exceed FHFA (Federal Housing Finance Agency) loan limits or use underwriting standards that are different from those set by Fannie Mae and Freddie Mac.

   Non-conforming loans are offered by mortgage lenders in several forms like:

   • Jumbo Non-conforming Loan

     • Loan limit: up to $1 – $2 Million
     • Criteria vary by lender but will usually include good credit score and a high down payment

   • Other Non-conforming Loans

     These are loans that do not fall into another category and are intended for borrowers with poor credit. These loans have high rates and may contain risky features like:

     • Minimal documentation of your income
     • Loans that allow you to pay only the interest or allow your loan balance to increase

     Some mortgage lenders may also offer niche programs with unusual criteria including:

     • Properties with non-standard features like an area having more than 10 acres of land, properties with agricultural income, or properties that are difficult to appraise)
     • Borrowers with tricky finances like self-employed borrowers or newly graduated doctors

3. Fixed-Rate Conventional Loans

   The interest rate stays the same for the whole duration of the loan for fixed-rate conventional loans. They are available in a 30-year mortgage and a 15-year option.

   They are the most predictable type since the rate is agreed upon in the beginning so a borrower will know exactly when and how much the interest and principal payments will be for the length of the loan.

   They are a great option if you plan to stay in your house for at least seven or more years and if you prefer predictable and stable mortgage payments.

4. Adjustable-Rate Mortgage (ARM) Conventional Loans

   An alternative to a fixed-rate mortgage is ARM with an initial interest rate that lasts for a few years and then adjusts every year after that.

   The rate will most likely go up after the initial fixed-rate period depending on the real estate market and the economy in general. You can use the ARM loan calculator to determine your expected monthly payments — before and after the reset period.
   ARM comes in two forms:

   • Hybrid ARMs have a fixed introductory period of multiple years and then adjusts every year for the remaining duration of the loan. The terms are usually set in three, five, seven, and ten years.
   • Traditional ARM where the interest rate is reset each and every year and is also called a variable rate loan.

5. Low-Down-Payment Conventional Loans

   Conventional loan low-down payments have become more flexible and extremely popular with today’s home buyers. There are six major options for low-down conventional loans:

   • Conventional 97 loan: 3% down
   • Fannie Mae HomeReady loan: 3% down
   • Freddie Mac Home Possible Loan: 3% down
   • Conventional loan with PMI: 5 % down
   • Piggyback loan (no PMI): 10% down

6. Conventional Portfolio Loans

   These are mortgages that lenders hold on their own books. The mortgage lenders establish their guidelines, which make it easier for some borrowers to qualify.

   Some lenders will allow the use of investment funds for a down payment.

   This type of loan works best for borrowers who are looking for flexible loan eligibility guidelines.

7. Subprime Conventional Loans or Non-qualified Mortgages

   If borrowers have poor credit or very low credit scores or other unique financial situations, this is one type of conventional loan that lenders offer.

   The government sets the guidelines for the marketing of these loans which are usually accompanied by high-interest rates and fees.

   If you have a DTI (Debt-to-income) ratio above 43% or other unique financial situations, but you can still comfortably afford a mortgage, this may be the best option for you.

So, Which Conventional Loan Type is Best?

The best conventional loan type that will make the most sense for you will depend on your financing needs and your financial situation. That is if you opt for a conventional loan for home financing.

Don’t rush on deciding on the home buyer loan that you will choose to finance your dream home.
Carefully considering the fees, the criteria, and the mortgage lender you will be working with may score you some big savings.

Need more help? Call Sprint Funding at 760-415-1452 and let our loan officers help you get started.

More from Sprint Funding
FHA Loans vs. Conventional Loans
How to Apply for a Cash Flow Loan