Conventional Mortgages – Explained

Mortgages can either be defined as government-backed or conventional. There are government bodies, namely the Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA) that insure home loans, which are financed by private lenders. Fees collected from mortgage borrowers, pays for this insurance.

Conventional loan is a mortgage which any government agency does not guarantee or insure, including the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the Farmers Home Administration (FmHA). Terms and rates of these are typically fixed.

Conventional Mortgages include the following types:

  • Conforming Mortgages
  • Non-conforming Mortgages
  • Jumbo Mortgages
  • Portfolio Mortgages
  • Sub-prime Mortgages

Out of all conventional loans about half of them are conforming mortgages. That’s because they conform to guidelines set by Fannie and Freddie. Fannie Mae and Freddie Mac are two GSEs (government-sponsored enterprises), that buy mortgages from lenders to sell to investors. They want to make mortgages more widely available.

Non-conforming Loans are the ones that do not conform to the GSEs’ guidelines.

When a Non-conforming loan is larger than limits of loan size set by the GSEs, it is referred to as Jumbo mortgages.

When Conventional loans are kept by the mortgage lenders, they are called portfolio loans. These are not sold to the investors. Because of this reason, lenders can set guidelines of their own for these loans. These loans therefore, may offer features that other mortgages do not. For instance, a borrower might be allowed by the lender to use personal investments (like stocks and bonds), as security. This may qualify the borrower for a mortgage for which they otherwise weren’t qualified.

Sub-prime mortgages are conventional home loans that are marketed to borrowers with low credit scores. They usually incur high fee and rate of interest. These loans are not “government-backed” as such, however, government has created special rules covering the sale of such products.

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