What is a Conventional loan and what are the requirements for it .?

Asked by Lucy Rangel, Fate, TX Fri Aug 21, 2009

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T.E. & Naima Sumner’s answer
T.E. & Naima…, Agent, Dallas, TX
Wed Aug 26, 2009
I like Tom's answer but for someone not involved in the industry you might want a little more detail.

Loans where the amount lent is less than 80% of the value of the underlying property are considered conventional loans. The lenders relies on the ability to sell the property at less than a 20% loss if the borrower fails to pay the loan off.

Lenders can get insurance or guarantees on loans they make. When a loan is insured or guaranteed, it can readily be sold in the secondary market, which is where FHLMC (Freddie Mac) and FNMA (Fannie Mae) operate. If the loan is insured with private mortgage insurance, it is a conventional loan.
If FHA guarantees the loan or VA issues a guarantee or USDA, then these loans are considered government-backed loans, not conventional bank loans. FHA charges a mortgage insurance premium (MIP) both upfront and each month until the loan drops below 80% LTV.
The secondary market for government-backed loans is quite active these days, because the losses banks suffered making conventional loans with PMI were staggering. Only recently have banks really started making more conventional loans.
Also, Fannie and Freddie have quite an inventory of foreclosed properties, as well as HUD (the parent of FHA) and VA.

The requirements for a conventional loan are similar to government-backed loans. You need good credit (620+), cash to put down on the house, and sufficient income to pay back the loan. Conventional lenders use similar ratios to determine if you have sufficient income, and similar down-payment requirements (but higher than FHA).

FHA wants 3-1/2% cash from a buyer-borrower. Conventional loans usually require 5% to 10%, although some of their foreclosed properties can be bought with 3% down. Rates are similar to FHA, perhaps a shade higher. The mortgage insurance (MI) wasn't available for a while because the PMI companies basically lost a lot of money. Now the MI rates are a little higher and graded by risk (credit score).

From your perspective there really is no difference in the loan paperwork and income requirements etc. But, you may not like the higher down payment and slightly higher interest rates. For borrowers with low loan-to-value (LTV) ratios, there really isn't a difference.

If you're a veteran, the VA offers loan guarantees on loans with no down payment. Texas offers special rates on loans to disabled veterans or normal rates on all other veterans but with lower fees -- the TexVet program is not VA, which is Federal.
You may not be a veteran, but out in Fate you can get a Department of Agriculture loan (USDA), which is very similar to the VA program, including zero down payment. USDA loans are restricted to rural areas.

FHA has no geographic limitations and has the smallest down payment for non-veterans and those in non-rural areas. Conventional loans are generally available everywhere, too.

Does that help?
Web Reference:  http://www.Mortgages-TX.com
0 votes
Brian Nguyen, Mortgage Broker Or Lender, Mission Viejo, CA
Wed Feb 19, 2014
There are several types of requirements that come along with this type of loan. A conventional loan usually requires a minimum credit score of 600-620. Also, it requires a minimum down payment of 10%-20%. These are just some things that are required for conventional loans. Well I hope this helps! If you have any other questions or if you would like a loan, feel free to contact me. Good Luck! Brian Nguyen Sr. Mortgage Banker NMLS # 659743 Phone: 949.667.2887 brian.nguyen@nafinc.com
0 votes
Chris Tesch, Agent, College Station, TX
Fri Aug 21, 2009
Dear Lucy,

A conventional loan is simply a loan with a fixed rate of interest that isn't guaranteed by the government (through FHA or VA). Conventional loans with at least 20% of the purchase price as a downpayment don't have to pay private mortgage insurance, which is a insurance that you pay to protect your lenders investment. PMI allows buyers with as little as 3.5% down to buy a home.

Most conventional programs out there currently are going to ask for 20% down (remember to calculate in your closing costs) and good credit.

For more information about the differences between FHA and conventional loans contact a good lender that has your interests in mind.
Web Reference:  http://www.ChrisTesch.com
0 votes
Tommy Burris, Mortgage Broker Or Lender, Baton Rouge, LA
Fri Aug 21, 2009
Instead of being backed by the Federal Government, a Conventional loan is backed by Fannie Mae or Freddie Mac(which are controlled by the government, go figure)

Requirements are a bit mor rigid on credit than FHA and high scores are more important.

Do you not have a loan officer? They can explain the difference between Conventional and any other loan program you qualify for.
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