In this post, we’re talking about conventional loans. In short, a conventional loan is a mortgage note that is owned by Fannie Mae or Freddie Mac. But, let’s dive a bit further in.

Fannie Who and Freddie what?

Fannie Mae and Freddie Mac are kind of like the head of the convention downtown. They’re who you book the room with, metaphorically speaking. The days of savings and loan companies are, for the most part, over. You’re not just going to your bank anymore and getting a loan from them. Now, yes, it is the bank giving you the money, but that’s only for a couple of days. See, what the banks do, is they turn around and sell that note to Fannie Mae or Freddie Mac, which are publicly traded companies. The reason the banks don’t own the notes is because they don’t have enough money to own all the notes in the country. Fannie and Freddie were created in order to help create liquidity in the market.

Backing up for a quick second

We have two main types of loans: conforming and nonconforming loans. Conforming loans are conventional loans, and non-conforming loans are something other than conventional loans. You can think of it as, if you follow these rules, then you’re going to get a bonus. And the bonus, in these cases, is basically a best-in-class low interest rate loan on a conventional loan. If you don’t fall into these categories you would go for a non-conforming, non-conventional loan. Conventional loans and following the rules laid out aren’t necessarily exciting, but they reward people who are consistent with a steady income, excellent credit scores, and a consistent job history. 

Conventional Loans

The limit right now for conventional loans is $548,250. These loans are intended for residential financing. They’re not for big commercial products or big multifamily ones, and they actually have a limit of up to a four-unit property. However, conventional loans do allow for investment properties, which is something that really distinguishes itself from the other programs. If you fall into some of the conventional financing brackets, this money is some of the cheapest money you can borrow for anything. Private mortgage insurance comes into play when a borrower gets a conventional loan and puts less than 20% down. Give us a call at 602-535-2171 to find out if conventional financing is a good choice for you.

Some other types of loans

We have a bunch of other blog posts on our site that discuss other types of loans. An FHA loan, a big government insured loan, would be another option. VA loans are another non-conventional loan as well.

At the end of the day with conventional loans…

It doesn’t matter if you compare it against jewelry, if you compare it against commercial loans, personal loans, HELOCs, you name it, this is going to be some of the cheapest money you will ever come across. This is all because there’s backing from Fannie and Freddie. Conventional loans can go up to a 95% loan-to-value, meaning that you just need 5% down, and in some cases just 3% down, to get a conventional loan, which is just incredible. If you want to know more about conventional loans shoot us an email at team@azmortgagebrothers.com and we’re happy to work out a plan that works for you.

Leaving you with a quick analogy

This is to help you with the idea of conforming to a loan. Imagine an investor goes out there and buys a home for $400,000, wants to take it to the market, sell it, and make $50,000. In this situation, she has all the risk. Will it sell for $450,000? What’s the state of the market? Now, compare this to the conforming, conventional loan from Fannie and Freddie. They go to the investor and say, hey we’re going to buy that house from you right now, but instead of you selling it to us for $450,000, you’re going to sell it to us for $401,000. She thinks that’s great. There’s already a buyer. So, she goes out and does about fifty of these a year, making a thousand on each one since there’s a guaranteed buyer. So, hopefully this makes a little sense on how these rates can be so low because they know that Fannie and Freddie are buying.

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Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.

Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.

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