Conventional Loans Basics

Conventional Loans

• Conventional loans are not government-backed loans.
• Conforming loans meet Fannie Mae and Freddie Mac guidelines for secondary market sale.
• Fannie Mae and Freddie Mac (GSEs) purchase loans, package them, or guarantee mortgage-backed securities (MBS).
• GSE MBS ensure timely payments; considered a high-quality investment.
• GSEs stabilize housing markets and promote affordable housing by reducing borrowing costs.
• Lenders are approved sellers/servicers, responsible for eligibility determination.
• Fannie/Freddie do not pre-approve, but may require repurchase of ineligible loans.
• Selling Guide manuals, regularly updated, define underwriting requirements for conforming loans.
• Lenders frequently use conforming standards as guidelines.
• Fannie Mae/Freddie Mac standards are similar but may differ, offering advantages in certain situations.
• Automated underwriting systems (DU, DO, LPA) help determine eligibility; positive findings aren't guarantees.
• Credit overlays, minimum credit scores, down payments, and other requirements can be included.
• Borrowers with 80%+ loan-to-value (LTV) equity can drop PMI.
• 3% down payment is possible with well-qualified borrowers, but requirements vary.
• PMI is often required if LTV exceeds 80%.
• Investment property loans require larger down payments (15%).
• Seller concessions have limits (primary, second homes or investment).
• Prepayment penalties are prohibited for GSE-sold loans.
• Most loans are fixed-rate, but conforming adjustable-rate mortgages (ARMs) exist.
• Loans over 80% LTV necessitate escrow for taxes and hazard insurance.
• Minimum hazard insurance coverage is mandatory.
• Specific coverage can be required in high-risk areas (e.g., windstorms).
• Flood insurance is required in flood-prone zones.
• Price adjustments based on risk characteristics exist (second homes, investment property, cash-out refinances, lower credit scores).
• Multiple risk factors mean potentially higher price adjustments.

Non-Conforming Loans

• Non-conforming loans aren't eligible for purchase by Fannie Mae/Freddie Mac.
• Loan amount, terms, underwriting standards, property type, documentation, or a combination can make a loan non-conforming.
• Secondary market for non-conforming loans differs; loans may be sold as "whole loans."
• Non-conforming loans usually come with higher interest rates and/or fees.
• "Jumbo" loans (exceeding conforming loan limits) are a common type of non-conforming loan.
• Jumbo and conforming loan credit, asset, and income standards are frequently similar.
• Automated underwriting systems are often used for underwriting Jumbo loans.
• Jumbo loans typically require good credit scores.
• Adjustable-rate mortgages are more common in Jumbo lending.
• High-income/high-net-worth consumers are less concerned about rate/payment increases.
• Underwriting overlays on Jumbo loans can be more restrictive.
• Down payment/LTV requirements vary for Jumbo loans but PMI may be required if LTV exceeds 80%.
• Private investors in the jumbo loan market may accept rates close to conforming loan market rates.
• Government loans are sometimes categorized as non-conforming, but normally in a separate category.

This quiz explores the fundamental concepts of conventional loans, including their characteristics, and the roles of Fannie Mae and Freddie Mac. Understand how conforming loans function and the impact of GSEs on housing markets and borrowing costs. Test your knowledge on underwriting requirements and automated systems used in loan eligibility determination.