What is a Conventional Loan?
A conventional loan is a mortgage loan that is not guaranteed or insured by any government agency. It is typically fixed in its terms and rate. About half of all conventional loans are also known as conforming loans, since they conform to a set of standards set by Fannie Mae and Freddie Mac.
Freddie Mac and Fannie Mae are organizations that are a part of the secondary mortgage market. Second mortgage market organizations buy pools of mortgages from primary lenders and sell securities by these pooled mortgages to investors.
The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a public government-sponsored enterprise (GSE), headquartered in the Tyson’s Corner CDP in Fairfax County, Virginia. Freddie Mac buys mortgages and pools them, selling bonds backed by the mortgages in the open market.
The Federal National Mortgage Association (FNMA), known as Fannie Mae, is a United States government-sponsored enterprise (GSE). Fannie Mae’s purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities.
Debt to Income Ratio (DTI)
The lenders will take this into consideration when you apply for a conventional loan. Debt to Income (DTI) Ratio varies between 40-50% (depends on the lender) but typically it is 43%. Example: If your gross annual income is $80,000 and…
- Monthly liabilities: $2,500
- Monthly Gross Income: $6,666
- DTI: 38% ($2,500/$6,666)
So as you consider your lending options, take note how much debt you currently have.
*These are just the basics, each lender will have certain DTI requirements. Consult a mortgage lender for your specific situation.
