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Definition of Conventional Mortgage Loan: What is a traditional mortgage loan?

How do conventional and non-conventional mortgages differ?

If you read about mortgages (which is fascinating! ), you’ll undoubtedly come across the phrase “traditional” loan. But what is a traditional mortgage?

No use for the Merriam-Webster dictionary Most of us interpret “conventional” as following “convention” or “lacking originality or uniqueness.” But most of us aren’t mortgage lenders.

“Not backed by the government” is what conventional means.

Many people believe that “conventional” refers to a “plain vanilla” mortgage with no creative or risky features. While many plain vanilla home loans are conventional, this is not the case for all of them. Many traditional loans also include features such as interest-only payments, large loan amounts, or adjustable interest rates.

Confusion: conforming vs. conventional

The tendency for mortgage articles, even those from seasoned loan professionals, to use the terms “conventional” and “conforming” interchangeably is one source of confusion. Because they must “conform” to guidelines established by Freddie Mac and Fannie Mae, the two entities that back or sell the majority of loans in the US, “conforming” loans can be considered “plain vanilla” or even “unimaginative,” as the dictionary puts it.

Confirmation: What does this mean?

Fannie Mae and Freddie Mac acquire mortgages from lenders, pool them, and then sell shares in the mortgages to investors. All of the loans in the pool need to have the same credit risk rating and terms. Lending money out to a variety of people can be a profitable investment, but how? By laying out the terms of the loans they want to purchase from banks and other lenders. Fannie Mae and Freddie are interested in loans that meet Fannie Mae and Freddie’s requirements. So, conforming loans are all conventional, but they are not all conventional.

Conventional home loans that don’t fit the rules

Not just Freddie Mac and Fannie Mae get money from the private sector to pay for mortgages in the private sector. Lenders can give out non-conforming mortgages as long as they keep the loans on their books. This is because they are the ones who will lose money if the loans fail. People often use the word “portfolio” to talk about these loans. There are also other options, like selling the loans directly to investors whose standards are different from Fannie Mae and Freddie Mac’s. Even though these loans aren’t backed by the government, they still fit the definition of a “conventional” loan. But their rules could be anything from very strict to very creative.

“Non-conforming” conventional loans can have almost any rules that the lender wants. So, a lender might give out loans of up to $2 million with a 10% down payment, but only to doctors with great credit. (This is an actual show.)

Contrast jumbo mortgages

One of the most common nonconforming factors is the amount of the mortgage. Fannie Mae and Freddie Mac have a limit to how many mortgages they will buy. As a consequence, large debts are referred to as “jumbo” or “super-jumbo.” The location of the property determines how much you can borrow with a conforming loan. In some “high-cost” places, they are over a million dollars.

Non-prime mortgages

Non-prime mortgages are types of non-conforming mortgages. These loans are riskier for the lender than most others. Mortgages for people with low credit scores are available, as are programs for people with good credit but special needs. For non-prime mortgages, bank statement systems are used to check borrowers’ income by keeping track of their monthly account activity. Applicants who don’t have enough taxable income might show their cash flow in other ways.

(As of this writing, stated income, no income verification, and no documentation loans are illegal. Borrowers must still show that they can afford the payments on any mortgage they are given.)

What this means for looking for a mortgage

When looking for a home loan, the type of mortgage you choose is important for a number of reasons.

Interest rates and terms for non-conforming loans vary a lot. As a result, it pays to look around for the best loan at the best rate. Because their rules aren’t standard, you might be able to find something better for you than the no-frills conforming products, but you’ll have to look harder. You can save more money on jumbo mortgages if you shop around because their rates vary and their size makes any savings you find bigger.

Because the non-prime market is so diverse, the rules for non-prime range from “almost conforming” to “completely wackadoodle.”

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