Which Conventional Loan is Right for You?

A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders, and its insurance is usually paid by the borrower.

Conventional loans are much more common than government-backed financing. In the first quarter of 2022, conventional loans were used for 74% of all new home sales, making them the most popular home financing option.

What are conventional mortgage advantages?

Conventional loans have a higher bar for approval than other types of loans do. They tend to be good for borrowers with good credit and a low debt-to-income (DTI) ratio who can make a down payment of 20%, as this allows them to avoid paying for private mortgage insurance (PMI).

Though conventional loans offer buyers more flexibility, they’re also riskier because they’re not insured by the federal government. This also means it can be harder for you to qualify for a conventional loan. But stay tuned; we’ll get to that later.

What Are the Different Types of Conventional Loans?

Conforming Conventional Loas?

In order to be considered a conforming conventional loan, the loan must meet the guidelines set by Fannie Mae and Freddie Mac. No, those aren’t your friendly neighborhood grandparents.

Fannie Mae (short for the Federal National Mortgage Association) and Freddie Mac (short for the Federal Home Loan Mortgage Corporation) are government-sponsored enterprises that purchase mortgages from lenders.

One of Fannie Mae and Freddie Mac’s most important ground rules is loan limit. For 2018, the baseline loan limit for one-unit properties is $453,100. It’s called baseline because the maximum amount—or limit—you can borrow is adjusted every year to match housing-price changes. In certain high-cost areas, the loan limit may increase to a maximum of $679,650.

Nonconforming Conventional Loan

A nonconforming mortgage is one that does not meet the guidelines of government sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac. Therefore, these mortgages cannot subsequently be sold to Fannie Mae or Freddie Mac. GSE guidelines consist of a maximum loan amount, suitable properties, down payment requirements and credit requirements, among other factors.

Nonconforming mortgages are not bad loans in the sense that they are risky or overly complex. However, financial institutions dislike them because they are harder to sell since they do not conform to GSE guidelines. For this reason, banks will usually command a higher interest rate on a noncomforming loan.

The most common nonconforming mortgage is what’s often called a jumbo mortgage. Jumbo mortgages are loans written for an amount more substantial than the Fannie Mae and Freddie Mac limits. In 2020 that limit in most U.S. counties was $510,400, but in some high-cost areas, it can be as high as $765,600 (for example in New York City or San Francisco).

The type of property can also determine if a mortgage is nonconforming. For example, buyers of condos often get tripped up when they learn their dream vacation unit is nonconforming because the complex is considered non-warrantable.

That includes condo associations where a single entity, such as the developer, owns more than 10-percent of the units. Other pitfalls include if a majority of the units are not owner-occupied, if more than 25-percent of the square footage is commercial, or if the homeowners association (HOA) is in litigation..