Conventional loans are anything other than government loans (FHA and VA loans).
Within the category of conventional loans, there are two sub-categories: conforming conventional loans, and non-conforming conventional loans.
Conforming conventional loans are loans that conform to the underwriting guidelines of Fannie Mae or Freddie Mac, which are companies that were established by Congress to purchase mortgages from lenders. They only purchase loans that are sold to borrowers with good credit, and that are below a certain dollar amount.
Non-conforming conventional loans do not conform to the Fannie Mae or Freddie Mac underwriting guidelines, either because the loan size is greater than the maximum conforming loan limit, or because the borrower does not meet the credit, income, or asset requirements that Fannie Mae and Freddie Mac have.
If a conventional loan is larger than the conforming loan limit, it is called a jumbo loan.
If a conventional loan does not meet the credit, income, or asset requirements of Fannie Mae and Freddie Mac, it is known as a sub-prime loan.
CONFORMING CONVENTIONAL MORTGAGES
Conforming loans are the most common type of loan used to purchase a house or refinance an existing mortgage. They are popular for the following reasons:
- Interest rates for conforming loans are determined by the borrower’s credit scores, so they are usually cheaper than other types of loans for people with good credit.
- Conforming loans only require 5% down, and depending on the property address, you may only need 3% down.
- If a borrower has 20% or more for a down payment, there is no mortgage insurance required for conforming loans. If a borrower has less than 20% down, they have to pay mortgage insurance, but it goes away with conforming loans once the borrower has 22% equity in the property.
There are limits to the amount of money you can borrow and still get a conforming conventional loan. The loan limits change at the beginning of each year. If the amount of money you need to borrow is greater than the conforming loan limit amount, you will need to either get a second mortgage to go along with the first mortgage, or you will need to get a jumbo loan. A jumbo loan is the name for a loan that exceeds the conforming loan limit amount.
Here are the 2019 conforming loan limits for the Denver metro area counties:
- Adams, Arapahoe, Broomfield, Denver, Douglas, and Jefferson Counties have a conforming loan limit of $561,200.
- Boulder County has a conforming loan limit of $626,750.
- If you are buying a 2-, 3-, or 4-unit house, then the conforming loan limits are higher.
JUMBO CONVENTIONAL MORTGAGES
If a loan is for an amount larger than the conforming amounts listed above, it is called a jumbo loan. Jumbo loans usually have higher interest rates than conforming loans, and they also usually require larger down payments. 15% – 20% of the purchase price is common for jumbo loans.
If you need a mortgage for more than the conforming loan limits, but don’t want to pay the higher interest rates or larger down payments associated with jumbo loans, one very good way to avoid both of those is to get two mortgages. The first mortgage would be for the conforming loan limit, and the second mortgage would be for the difference between the conforming loan limit and 90% of the purchase price. The remaining 10% would be for the down payment. As an example, if a house in Denver costs $700,000, the down payment would be 10% of that, or $70,000. The first mortgage would be for $561,200, which is the conforming loan limit. The second mortgage would be for $68,800, which is the difference between the purchase price and the total of the down payment and the first mortgage. If you did it this way, you would get the lower interest rate of the conforming loan, you would only have to put 10% down, and you would not have to pay mortgage insurance because neither the first nor the second mortgages would be for more than 80% of the purchase price.
SUB-PRIME CONVENTIONAL MORTGAGES
Sub-prime loans are loans that do not meet the underwriting guidelines of Fannie Mae or Freddie Mac. The interest rates are much higher than they are for conforming loans. We do not sell sub-prime loans because we don’t think they are in a borrower’s best interests. Instead, we would rather give you advice regarding credit, income, and assets so that you can eventually qualify for a mortgage that is not a sub-prime loan.