A conventional mortgage loan is a mortgage that is not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA).
A Qualified Mortgage (QM) is a type of conventional loan that meets specific, less-risky criteria. This designation provides a “safe harbor” for lenders, protecting them from legal liability if a borrower defaults. To be a QM, a loan must have certain features:
No risky features: This includes no interest-only periods, negative amortization (where the loan balance increases over time), or balloon payments (with some exceptions for small creditors in rural areas).
Maximum loan term: The loan term cannot be longer than 30 years.
Ability to repay: The lender must make a good-faith effort to verify the borrower’s income, assets, and debts to ensure they have the ability to repay the loan.
Within the category of conventional QM loans, there are several common types:
Conforming Loans: These are the most common type of conventional QM loans. They “conform” to the guidelines set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) that buy mortgages from lenders. These guidelines include a maximum loan amount, and they typically require a good credit score and a manageable debt-to-income (DTI) ratio.
Jumbo Loans: These are non-conforming loans because the loan amount exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). They are used for high-value properties and, as a result, often have stricter requirements, such as a larger down payment, higher credit scores, and a lower DTI ratio.
Fixed-Rate Loans: With this type, the interest rate remains the same for the entire life of the loan. This provides predictable and stable monthly principal and interest payments. Fixed-rate conventional loans are a common option.
Adjustable-Rate Mortgages (ARMs): The interest rate on an ARM is fixed for an initial period (e.g., 3, 5, 7, or 10 years) and then adjusts periodically for the remainder of the loan term. While the initial interest rate is often lower than a fixed-rate loan, the monthly payments can fluctuate after the introductory period.