A conventional loan is any type of mortgage that is not secured by a government-sponsored entity (GSE).
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About Conventional Loans
A conventional loan is any type of mortgage that is not secured by a government-sponsored entity (GSE), such as the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).
These loans are also known as “conforming loans” because they meet guidelines or “conform” to the rules set forth by Fannie Mae and Freddie Mac, the two largest investors of conventional loans. The rules they conform to include a minimum FICO requirement of 620.
DTI represents the amount of your monthly mortgage payments and other debts in comparison to your monthly gross income. Total debts usually can’t exceed 50% of your monthly gross income. In certain circumstances, you can have a DTI as high as 50%, but only if you meet Fannie and Freddie’s requirements, including exceptional credit history.
Two Basic Types of Conventional Loans
Your mortgage rate never changes over the life of your loan.
After an initial fixed-rate period, your interest rate can adjust up or down, depending on the market. This option can save you money if you plan to move or refinance within 5–10 years.
In the past, prospective homeowners were required to put down at least 5% for conventional loans, but a recent program now allows down payments as low as a 1%. With attractive interest rates and the option for a low down payment, a conventional loan is a great option for some buyers.