When you hear the words “conventional mortgage” or “conventional loan”… do you ever wonder exactly what that means? The definition of ‘Conventional’ is simply something that “follows general forms or beliefs”. Simply put, a conventional mortgage is a mortgage or loan that follows certain guidelines set forth by Freddie Mac and Fannie Mae.
Conventional mortgages are often referred to as “Conforming Loans”. Notice the word ‘conforms’. It refers to a loan that ‘conforms’ to all the necessary criteria and guidelines. A loan that does not conform to the general guidelines is referred to as a “non-conforming loan”. But…to complicate things, a loan that is non-conforming simply because the loan amount exceeds the guidelines is called a jumbo loan (which you will learn about later!).
What Are the Conventional loan limits for the state of Arizona?
|Single Family ||Du-plex ||Tri-plex ||Four-plex |
|$424,100 ||$543,000 ||$656,350 ||$815,650 |
But what is “Freddie Mac” and “Fannie Mae”?
These are the two government sponsored enterprises that are the source of mortgage money in the United States. Any Phoenix loan not guaranteed by the US Government are considered “conventional”.
Why is this important? Let’s look at an example that could apply to you!
Let’s say you get a home loan in Phoenix for $250,000 from your bank. The bank will pay the seller $250,000 but you have 20 or 30 years to pay the bank back that money, right? Since a bank can’t tie up their money for 30 years (they’d never be able to afford to give another auto loan or even a credit card!) Fannie and Freddie will “buy” that mortgage (or loan) from the bank! The money that Fannie and Freddie gives to the banks is secured by bundling your loan together with thousands of other loans and selling them “bonds” to investors.
In effect, thousands of people could own a small piece of your mortgage loan. This is how banks can loan money out for very long periods of time.
However, when it comes to Phoenix Home Loans or any other type of Arizona Conventional Loan, there are some strict guidelines that need to be met before Fannie Mae and Freddie Mac can purchase the loan such as:
- They must meet the conforming loan limit which is evaluated every year.
- The loans must have been made to a borrower with a minimum Credit Score.
- It must meet specific debt-to-income ratio guidelines.
- Private Mortgage Insurance, or PMI, is required for all loans where the borrower has less than 20% equity.
- Plus other guidelines that are important, but I won’t bore you with all those details
What a Phoenix, AZ Conventional Loan boils down to is…even though Fannie Mae and Freddie Mac purchase the loans from ‘lenders’, it’s the LENDER who services the loan. Or, in other words, the lender “collects your payments”.