Conventional Loans Dominate U.S. Mortgage Market

September 29, 2014 - 4 min read

Even as they’re losing market share, conventional mortgages via Fannie Mae and Freddie Mac dominate today’s mortgage lending landscape.

According to mortgage origination software maker Ellie Mae, nearly two-thirds of August’s closed loans were financed with conventional loans, with the majority of the remaining closed loans spread across and .

A small percentage of August’s closed loans were linked to portfolio and jumbo loans.

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What Is A Conventional Mortgage?

A conventional mortgage is a home loan which is not explicitly guaranteed or insured by a government agency. Conventional mortgages are typically backed by Fannie Mae or Freddie Mac, but not always.

Fannie Mae and Freddie Mac are securitizers of mortgages. This means that the groups purchase mortgage loans from lenders, then packages those loans into marketable bonds known as mortgage-backed securities (MBS).

Mortgage-backed securities are bought and sold on Wall Street. The prices of MBS affect current mortgage rates directly.

When mortgage bond prices rise, mortgage rates drop. When mortgage bond prices fall, mortgage rates rise.

A large majority of conventional mortgages are issued as “conforming loans”, which means that the loans, literally, conform to the securitization standards of Fannie Mae and Freddie Mac. Together, these standards are commonly known as “mortgage guidelines”.

Mortgage guidelines cover ever aspect of a home loan. Mortgage borrowers are expected to meet certain minimum eligibility standards; as is the subject property, as well as the nature of the transaction (i.e. purchase, , construction loan).

For example, today’s conforming mortgage guidelines require borrowers to pay private mortgage insurance (PMI) for purchase loans with less than 20% down; and, require that a borrower’s FICO score be at least 620 in order to get approved.

Conforming mortgage guidelines also enforce home appraisal standards by which all approved loans must abide.

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Conventional Loans Are 64% Of Mortgage Market

It’s “getting easier” to get approved for a conventional mortgage, according to a Federal Reserve survey of the nation’s mortgage lenders. Nearly a quarter of surveyed banks reported a loosening of mortgage guidelines last quarter.

This loosening may be among the reasons why conventional loans maintain a large market share over other loan types including FHA loans, which typically provide borrowers with lower mortgage interest rates, but higher long-term costs of homeownership via mortgage insurance premiums.

Another reason is that FHA loans are limited to loan sizes $271,050 in some U.S. counties. The minimum conforming mortgage loan limit for 2014 is $417,100.

Conventional loans are also preferred in “niche” lending situations which would be impossible via an FHA loan, VA loan, or USDA loan.

For example, conventional mortgages can be used to finance the purchase of an investment property whereas FHA and VA loans cannot. Furthermore, via the Delayed Financing program, a home purchased with cash can be “cashed out” via a conventional mortgage financing just 1-day after closing.

The FHA and VA have no such program.

Another niche loan via Fannie Mae and Freddie Mac is the 5-10 Properties program. Available to borrowers with more than four properties financed, the 5-10 Properties program allows the purchase and refinance of any residential property meeting minimum loan-to-value requirements.

Lastly, conventional mortgage applicants get access to the Home Affordable Refinance Program ().

HARP is a special refinance program available to homeowners with existing conforming home loans. HARP gives access to today’s mortgage rates regardless of a home’s loan-to-value.

HARP has been used more than 3 million times since 2009 and the government estimates that, with current mortgage rates near 4 percent, more than 667,000 U.S. homeowners remain “in the money” and eligible to HARP-refinance.

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Alternatives To Conventional Mortgages

Conventional mortgages are the most common loan type in today’s mortgage market, but they’re not what’s best for everyone; nor will everyone qualify for conventional loan financing.

For everyone else, there are four main loan types from which to choose.

FHA Loans

An is a loan insured by the Federal Housing Administration (FHA). FHA loans are available to homeowners with or higher, although the FHA permits loans to borrowers with no credit scores whatsoever in certain circumstances.

FHA loans require a minimum downpayment of just 3.5% and can be used by borrowers in all 50 states, plus Washington, D.C. and Puerto Rico, among others.

FHA loans require mortgage insurance premiums (MIP) regardless your downpayment or home equity position.

VA Loans

VA loans are loans made to military borrowers and which are guaranteed by Department of Veterans Affairs. VA loans are available with 100% financing and never require mortgage insurance. VA mortgage rates are typically the lowest among all commonly used mortgage types.

VA loans require a minimum credit score of 620 and underwriting standards are flexible.

For eligible borrowers, the VA Loan Guaranty program is often the most cost-effective way to finance a home purchase.

USDA Loans

USDA loans are loans which are guaranteed by the U.S. Department of Agriculture. Formally known as Section 502 home loans, USDA loans are available to homeowners in rural parts of the country, and in less-dense suburban neighborhood nationwide.

USDA loans allow for 100% financing with reduced mortgage insurance requirements. Homeowners are also subject to a maximum USDA income limit, which increases with the number of persons in a household.

Jumbo Loans

Jumbo loans are loans which exceed local conforming loan limits. Jumbo loans begin above $417,100 in most parts of the country, and begin above $636,100 in “high-cost” areas such as San Francisco, California; New York, New York; and, Montgomery County, Maryland, an area which includes Bethesda and Potomac.

Jumbo loans are rarely securitized via Fannie Mae or Freddie Mac and loan guidelines vary from bank-to-bank. In general, jumbo loans require decent credit scores and strong, verifiable income.

Get Today’s Mortgage Rates

Today’s mortgage rates are hovering near 16-month bests. The majority of home buyers and refinancing households will use conventional mortgage financing, but FHA loan and VA loans are used a lot, too.

Compare current mortgage rates and see which program is best for you. Rate quotes are available online at no cost, with no social security number required to get started, and no obligation to proceed.

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Dan Green
Authored By: Dan Green
The Mortgage Reports contributor
Dan Green is an expert on topics of money and mortgage. With over 15 years writing for a consumer audience on personal finance topics, Dan has been featured in The Washington Post, MarketWatch, Bloomberg, and others.