What is a Conventional Loan?
When considering a conventional loan in San Diego, you should understand this form of financing, including the advantages and disadvantages for these mortgages. This article will explain what a conventional loan is and how it is different from other types of mortgages.
If you are purchasing a home, there’s a good chance you’ll need to borrow money to make the purchase. And if you need to borrow, there’s a good chance you’ll use a conventional loan.
These loans, which make up a large portion of the total mortgage industry, are extremely common yet misunderstood. For many people, they are like a car’s engine; we know it’s there, we know what it does, but we don’t know how it works.
At San Diego Purchase Loans, we believe informed borrowers make the best home buyers. With that in mind, you should understand conventional loans and know the advantages, disadvantages, and details of this financing. And if you need a conventional loan in San Diego, the surrounding area, or any of the states we serve, we’ll be here to help!
What is a “Conventional Loan?”
A conventional loan is simply a mortgage that is not insured, guaranteed, or supported (at least not directly) by any government institution. Instead, the mortgage is backed by private organizations, with mortgage insurance (when required) paid by the borrower.
Conventional loans offer greater flexibility because they are not required to meet the highly specific standards and requirements set by various government organizations. However, they are not always more lenient, as lenders don’t have the safety net that comes with loans supported and insured by the federal government. If an FHA loan (non-conventional) goes into default, the lender is provided financial support by the FHA; conventional loans have no such benefit. So while lenders don’t have to meet the standards of the government, and can set credit and downpayment requirements (mostly) at their own discretion, the requirements may be higher to compensate for the lack of institutional support.
A significant portion of all mortgage loans made in the United States are conventional loans. According to data provided by the United States Census Bureau, conventional loans make up roughly three quarters of all home loans made across the country. In 2020 there were roughly 570,000 conventional loans but only 153,000 FHA loans and 63,000 VA loans. During the year, conventional loans were 69% of all purchases made while FHA loans were only 19%.
In 2018, conventional loans made an even larger percentage. Of the 617,000 purchases in the Census Bureau’s data, 461,000 were made with conventional loan, good for 75%.
In general, these loans are so common because they are readily available to most buyers and bring reasonable credit and downpayment requirements.
Conventional Loans: Conforming and Non-Conforming
There are many types of conventional loans, but they generally fall into two categories: conforming and non-conforming.
A conforming loan is a mortgage that meets the requirements to be sold to Fannie Mae and Freddie Mac. These two organizations, which are technically not government groups but government-supported private organizations, purchase loans on the secondary market. Making loans that can be bought by Fannie and Freddie is beneficial to the lender and creates more opportunity for borrowers.
Conforming loans are usually sold to these mortgage investors within a couple months of closing. These sales allow lenders to have consistent cash flow and provides an incentive to create loans, thereby increasing (at least in theory) homeownership among the American public.
Non-conforming loans, the other category of conventional loans, do not meet the requirements to be purchased by either Fannie Mae or Freddie Mac. These loans can be larger than the limits set by these organizations, or they can have extremely low credit or downpayment requirements. (Usually if one is high, the other is low. For example, if you need a low-credit non-conforming loan, you’ll need a high downpayment.)
Getting a Conventional Loan in San Diego: Understand the Different Types
Jumbo (A Type of Non-Conforming)
Jumbo loans, by their very nature, are ineligible for government backing or for being purchased on the secondary market by Fannie Mae or Freddie Mac. This makes them a type of non-conforming conventional loan.
Jumbo loans are for amounts higher than the typical limit, which is usually set by the Federal Housing Finance Agency. The amounts can be in the millions, even multiple millions of dollars, and they provide financing for the purchase of large properties or high-end luxury homes. Conventional loans in San Diego are often jumbo purchases, as there are many top-end homes in our area.
This is a type of loan that caters to low-credit buyers or people with unique financial situations. Self-employed individuals and commission-based professionals often utilize this type of conventional loan in San Diego. These loans often have higher interest rates to compensate for the increased risk to lenders. Of course, lenders still go through the comprehensive application process to ensure a buyer has the ability to repay.
Buyers with past credit or payment issues, or ones with high debt-to-income ratios will find these loans useful.
A portfolio loan is a type of mortgage that is not sold on the secondary market but is instead kept on the financial books of the lender. They keep it in their “portfolio” of investments and loans. These loans can be flexible on requirements, but lenders are extremely cautious when creating these mortgages, as keeping them on the books can be more profitable but also risky.
What Loans are NOT Conventional Loans?
There are many type of loans that cannot be considered conventional. These loans usually are supported by a government agency or department of some type, and they are often limited in availability.
VA loans, as an example, are not conventional loans. While useful, these loans are only available to current and past United States service members, acting as a benefit for service to our country. They have excellent terms, but only a small portion of buyers are eligible. FHA and USDA loans are other examples of non-conventional financing.
Apply for Your Conventional Loan in San Diego Today!
If you are ready for a conventional loan in San Diego, contact our team today. We’ll take a common-sense approach to your loan so you can get the best financing to meet your specific needs!