Conventional Home Loans
In general, any loan which does not meet guidelines is a non-conforming loan. A loan which does not meet guidelines specifically because the loan amount exceeds the guideline limits is known as a jumbo loan.
In the United States, a conforming loan is a mortgage loan that conforms to GSE guidelines.
Starting in 1970, Fannie Mae was authorized by the United States Government to purchase residential mortgage loans. Fannie Mae worked with Freddie Mac to develop uniform mortgage documents and national standards for what would come to be known as a conforming loan.
Fannie Mae and Freddie Mac are continuously in the market for conforming loans; because of this, conforming loans benefit from greater liquidity than non-conforming loans.
The Office of Federal Housing Enterprise Oversight (OFHEO) set the criteria on what constitutes a conforming loan limit that Fannie Mae and Freddie Mac can buy. Criteria include debt-to-income ratio limits and documentation requirements. The maximum loan amount is set based on the October-to-October changes in median home price, above which a mortgage is considered a jumbo loan, and typically has higher rates associated with it. This is because both Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market, making the demand for a non-conforming loan much less. By virtue of the laws of supply and demand, then, it is harder for lenders to sell the loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a percent.)
A temporary increase in the Conforming Loan Limits for high-cost areas of living has been incorporated into the 2008 economic stimulus package. Congress has authorized an increase of the single family residences limits to the lesser of $729,750 or 125% of the median home value within the metropolitan statistical area (MSA). High-cost loans are only available through FHA loans.
The bill was signed into law by President Bush on February 13, 2008 but the new rates are still not being honored by any lenders (as of March 30, 2009).
The new jumbo-conforming program has been adopted by Fannie Mae and Freddie Mac effective April 1, 2008 until December 31, 2010.
Home buyers can take out an amortized conventional loan from a bank, a savings and loan, a credit union or even through a mortgage broker that funds its own loans or brokers them. Two important factors are the term of the loan and the loan-to-value ratio:
- 95% LTV with a 30-year term
- 90% LTV with a 30-year term
- 85% LTV with a 30-year term
- 80% LTV with a 30-year term
The LTV can be lower than 80%. It can be whatever is comfortable for a borrower. If the LTV is higher than 80%, lenders require that borrowers pay for private mortgage insurance. The term of the loan can be longer or shorter, depending on the borrower’s qualifications. For example, a borrower might qualify for a 40-year term, which would lower the payments. A 20-year term loan would raise the payments. Here are a few examples of how the payments can change depending on the term of the loan:
- A $200,000 loan at 6% payable over 20 years would result in a payment of $1,432.86 per month.
- A $200,000 loan at 6% payable over 30 years would result in a payment of $1,199.10 per month.
- A $200,000 loan at 6% payable over 40 years would result in a payment of $1,100.43 per month.
A fully amortized conventional loan is a mortgage in which the same principal and interest payment is paid every month, from the beginning of the loan to the end of the loan. The last payment pays off the loan in full. There is no balloon payment.
Conforming loan limits are $417,000. A minimum fico score for a good interest rate is higher than those required for an FHA loan. Loan limits above $417,000 are considered jumbo loans and the interest rates are higher.
Adjustable Conventional Loans
An adjustable-rate conventional loan means the loan is adjustable, it can fluctuate. Some loans are fixed for a certain period of time, and then they turn into adjustable-rate loans. Here are three popular types of adjustable conventional loans:
- 3 / 1 ARM. This loan is fixed for 3 years, and then it begins to adjust for the remaining 27 years.
- 5 /1 ARM. This loan is fixed for 5 years, and then it begins to adjust for the remaining 25 years.
- 7 / 1 ARM. This loan is fixed for 7 years, and then it begins to adjust for the remaining 23 years.
Features of an Adjustable Conventional Loan
Many borrowers shy away from an adjustable rate conventional loan and prefer to stick with a traditional amortized loan. For borrowers whose income may go up, an adjustable rate mortgage might be just the ticket to help with the early years of payments.
- The initial interest rate is lower than the rate for a fixed-rate loan.
- There is a maximum amount the loan can adjust over the life of the loan known as a cap rate.
- The interest rate is determined by adding a margin rate to the index rate.
- Adjustment periods can be monthly, every six months, or every year, among other choices.
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