Conventional Mortgage Loans: The Basics on How They Work
It used to be that when people would get a mortgage, they would go to a lender and borrow money. The lender that they got their loan at would hold onto their loan and collect payments from them each month according to the loan terms.
In the 1930s, a market was developed for these lenders to originate mortgage loans with their customers and then “sell” them to other investors who then would collect the mortgage payments each month according to the loan terms. Today, it is very common for lenders to sell their loans on the secondary market.
In the United States, there are two large buyers on the secondary market for mortgages — Fannie Mae and Freddie Mac. These two entities produce a set of guidelines where if mortgages fit the guidelines, then they agree to buy them. These guidelines outline the basic “rules” of getting a mortgage from them, and part of the outline is a limit on the amount that the loan can be for.
Types of Conventional Loans
It is possible for a conventional loan to be considered a “conforming” or a “non-conforming” loan. Conforming loans adhere to the guidelines set forth by Fannie/Freddie and also the “conforming” loan limit set out by the two entities.
The 2016 conforming loan limits were set at $417,000 for all contiguous states, the District of Columbia, and Puerto Rico and $625,500 for Alaska, Guam, Hawaii, and the U.S. Virgin Islands. For more detailed information, visit this page.
Conventional loans have various types of programs, including fixed rate programs, ARM programs, interest-only programs, hybrid rate programs, and balloon payment programs.
The easiest way to see what conventional loan program can best help you finance your home? Speak with a lender who helps people follow the guidelines for conventional loans.
Any questions about conventional loans?
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Joshua Dorkin is a serial entrepreneur, investor, podcaster, publisher, educator, and co-author of How to Invest in Real Estate. He started BiggerPockets to help democratize the real estate investing landscape for himself and others, aiming to make it accessible for everyone, regardless of income or education. Today, BiggerPockets is the premier real estate investing website online with over one million members and reaching over 70 million people with the message of financial freedom through real estate investing. Joshua, along with his wife and three daughters, make their home in Denver, Colorado, and spend any time they can traveling, exploring, and adventuring. Read more about Joshua’s story in 5280 and Inc.com.