How is a fixed rate conventional loan a conforming loan?
A conventional loan is also called a conforming loan because loans in this category have to conform to a set of regulations and lending guidelines. Fannie Mae and Freddie Mac, with oversight from Federal Housing Finance Agency, work together to place standardized lending practices on conforming loans to ensure banks and their loans only lend money in a certain way, to certain borrowers, who meet certain criteria.
This serves two major and important goals:
1) Provide stability to the US housing market
2) Create standards and requirements on mortgages that are attractive to investors, thus allowing liquidity to flow into the housing market at affordable and reliable rates.
Regulating banks and requiring residential lenders maintain a consistent standard to qualify for a conventional home loan prevents economic meltdowns, and promotes a healthy housing economy that will continue to prove a reliable future investment for US families.
People who refer to conventional loans are often talking about conforming loans, so here when we’re using the term conventional, we assume that means conforming.
If you’re someone who’s been doing some research online, hopefully that definition helps explain the confusing relationship between conventional and conforming
Why a fixed rate and not adjustable?
Prior to the mortgage meltdown of 2006-2010, non-conforming adjustable rate mortgages (ARMs) with virtually no verification were very common. Families would buy a house utilizing an adjustable rate mortgage either to keep their payment artificially low for a short period of time, or because the qualifying was so easy on ARMS.
There was a rampant belief encouraged by ill-advised mortgage and real estate professionals that you could always “refinance” in a few months to get into a better loan down the road.
Then the bubble burst...
Unfortunately, if your home is worth less than you owe on it, no bank is going to lend on a bad asset and it’s pretty much impossible to refinance. So when home prices took a dive around 2008, many, many people were stuck with high interest rates and couldn’t get out.
A lot of families had to face foreclosure, investors became extremely wary of US mortgages, liquidity in the housing market dried up, and it became very difficult to qualify for and obtain a mortgage..
It wasn’t until the federal government stepped in, lowered interest rates to historic lows and introduced HARP, heavily encouraging banks to lend on underwater homes, that real estate prices started to level off and banks begin to lend once again.
In today’s mortgage climate, an ARM can still be a valuable tool for buyers, but only for a special type of experienced and knowledgeable buyer, who knows the full extent of adjustable rates.
Most of our clients are families looking for a steady investment in their home, and a fixed rate mortgage is the way they accomplish that. Our conversation today is aimed at helping you understand everything you’d want to know about getting a fixed rate conventional loan.