Conventional Fixed Mortgages & Adjustable Rate Mortgages (ARMs)
- Require a down payment of 3%-20%
- Loan limit of $453,100
- Fannie Mae & Freddie Mac
How they work: "The dominant number of loans made in the conventional market use Fannie Mae and Freddie Mac guidelines for conforming loans," says John Councilman, federal housing chairman for The National Association of Mortgage Brokers in McLean, Va. The U.S. government bailout of Fannie Mae and Freddie Mac may affect both entities' underwriting guidelines going forward, but no changes have been made yet.
Conventional loans are "conforming" if they are generally $453,100 or less for a single-family home. Conforming loan limits can be higher in pricier regions of the country.
There are also established guidelines for borrower credit scores, income requirements and minimum down payments. For example, most conventional loans require somewhere between 3 percent and 20 percent down.
"Right now those guidelines are changing frequently but they should have at least a 620 credit score," Councilman says. "Anything below a 740 credit score and they (lenders) are going to start adding fees which can be quite sizable, in the several-percent range, as borrowers' credit scores drop compared to loan-to-value (LTV)."
Conventional loans can be conforming or nonconforming. Loans above the lending limits set by Fannie Mae and Freddie Mac are called nonconforming or jumbo loans.
Most conventional mortgages have either fixed or adjustable interest rates. Typical fixed interest rate loans have a term of 15 or 30 years. A shorter-term loan usually results in a lower interest rate. Adjustable-rate mortgages, or ARMs, fluctuate in relation to the rate of a standard financial index, such as the LIBOR. Monthly payments can go up or down accordingly.