What is a conventional loan really?

[Jay Hurst]

I hear often from borrowers that my credit union or my loan officer/lender can do a conventional loan under circumstances that I or others cannot. The issue with that is conventional loan, in this context, means that the loan conforms with Fannie Mae and/or Freddie Mac requirements the two government sponsored enterprises (GSE). They make the rules for ALL conventional loans. These rules are not in anyway set by the lender/bank/credit union. The specs of the loan including the obvious ones like loan to value, credit score etc but much less obvious specs to borrowers like when you can pull out cash, the max cash out allowed on a home owned for under 6 months with no mortgage, how income is calculated etc are all the same and set by the GSE's.

These requirements are published online. The info is available and easy to find BUT there are pages and pages of requirements. If the loan does not meet there needed specs, they will not buy the loan, leaving the lender with a 30-year fixed loan at rates they do not want to carry for the long term. Often inexperienced loan officers and loan officers at banks and CU's simply do not see many deals that are not very straight forward so they just do not know, so they might inadvertently waste your time because the underwriter will know and deny the loan 3 weeks down the road.

To complicate it a bit more occasionally lenders will have "overlays" which just means even if Fannie/Freddie allow a certain loan spec, that lender does not for whatever reason but that is typically credit score related. Also, of course there are other loans then just conventional. Lenders/Banks/CUs can make loans that they do NOT sell to Fannie/Freddie. They can make loans that are going to be sold to a different investor, think DSCR loans, where they still must make sure the loan conforms to THAT program's requirements, but those requirements are quite different then conventional. They can also make portfolio loans that they can make up their own rules, but they will have to own that loan until is paid off. As you might imagine these have higher rates since the interest rate risk is on the lender.

Bottom line, make sure you LO/lender has experience and understands what they are talking about. if you have been told you cannot do a certain circumstance as a conventional loan by one lender but a different lender say no issue, do a little digging and ask questions so you can figure out which one is correct or you might waste a lot of time.