Conventional loans are mortgage loans offered by non-government sponsored lenders, and are purchased by Fannie Mae(FNMA) and Freddie Mac(FHLMC). Fannie Mae and Freddie Mac than bundle mortgages(referred to as "securitization") and sell these securities to investors.
Fannie Mae and Freddie Mac have established lending limits. Mortgages at or below these limits are called "Conforming" mortgages, because they adhere to these guidelines. This is why you will see the term "conventional" and "conforming" being used interchangeably to represent the same type of loan programs.
Number of Units Maximum original principal balance Alaska, Guam, Hawaii, and U.S. Virgin Islands only 1 $417,000 $625,500 2 $533,850 $800,775 3 $645,300 $967,950 4 $801,950 $1,202,925
These loan types fall under 2 basic categories:
- Fixed Rate Home Loans: Fixed interest rate home loans are well suited for the home buyer who plans on being in their home for an indefinate period of time and prefers the certainty of a fixed interest rate. 30/25/20/15/10 year fixed loan options are available, Pierce/King/Snohomish county loan limits are $506,000. Washington State loan limits in most other counties are $417,000, Purchase LTV max is 97%, Cash Out Refinance LTV is 85%. 620 FICO middle score or higher is required for purchases. The higher the credit score, the better the interest rate on your fixed mortgage.
- Adjustable Rate Loans (ARMs): These conventional products are generally chosen for buyers who know they will own the home for only a specific period of time, and/or will experience an increase in household income. Initial interest rates are lower than fixed rate loans and will adjust at predetermined periods of time. The initial fixed rate period may be 3 (FNMA 3/1 YR LIBOR ARM),5 (FNMA 5/1 YR LIBOR ARM),7 (FNMA 7/1 LIBOR ARM) or 10 years (FNMA 10/1 YR LIBOR ARM) . After the initial interest rate fixed period, rates will adjust annually. Interest rates are established through an established margin and an index(like the LIBOR). The index is the average of the interbank offered rates for one-year U.S. dollar-denominated deposits in the London market("LIBOR"), as published in "The Wall Street Journal". The most recent Index figure available as of the date 45 days before each Change Date is called the "Current Index". Consumers are protected through a CAP structure, depending on which ARM program is selected. These CAPS establish the maximum allowable initial interest rate adjustment, the maximum allowable annual interest rate adjustment and a lifetime maximum interest rate allowable adjustment. As an example, a 3/1 ARM–2% initial, 2% annual, 6% lifetime.