Conventional Loans

The defining feature of conventional loans is that they are secured by entities sponsored by the federal government, such as Fannie Mae and Freddie Mac. Conventional loans are made for the purchase or refinancing of single family homes or four family homes. These loans are limited to first and second mortgages. Loan limits apply to conventional loans. In 2004, the single family home loan amount is limited to $333,700. The limit for two family homes is $427,150; the limit for three family homes is $516,300; and the limit for four family homes is $641,650. A second mortgage is limited to $150,350 across the board. However, these limits are not permanent, and are reviewed annually to determine if a change is needed. Changes reflect shifts in the national average price of housing in the U.S.

Loans for more money than the Fannie Mae and Freddie Mac limit are called jumbo loans. Because they exceed these limits, jumbo loans are not sponsored by these government entities. This means they may require a higher interest rate and additional underwriting efforts. An option to consider if you are making a purchase that exceeds the $333,700 limit is combining first and second trust money. This combination is often called an 80/10/10, an 80/15/5, or an 80/20. Though not everyone can take advantage of this combination, and every situation may require a different approach, the combination is one option to consider if you find yourself making a purchase that exceeds the amount limit.

Conventional loans employ common loan structures like fixed rate, adjustable rate, and balloon loans. In addition to these traditional structures, Freddie Mac and Fannie Mae have other programs such as low or no down payment loans, affordable housing initiatives, and community lending. Also available through these government sponsored entities, are home improvement and reverse mortgages.