What Is A Conventional Loan?
Conventional loans are usually home loans that are not guaranteed, nor insured with the help of the federal government.
For example, loans that adhere to requirements set out by Fannie Mae and Freddie Mac usually ask for a down payment of 3%. The Federal Housing Administration also has relaxed standards that can make it possible to have a down payment of 3.5%.
Loan programs backed by the federal government, aside from those through the Federal Housing Administration, include VA loans and USDA loans.* VA loans are available for active military personnel and veterans, while USDA loans are targeted towards those who are buying rural property since they are backed by the Department of Agriculture.
How Can I Benefit From Applying For A Conventional Loan?
Conventional loans are seen as riskier because there is no one to guarantee them, but they can be more manageable for people to take on because insurance premiums can be lower than their government counterparts.
The typical profile of a person who takes on a conventional loan is often one who is financially secure, unlikely to default and prepared to place a larger down payment. With such a high risk, conventional loans might come with a big down payment that could total up to 20% of the loan. However, some programs are offered where people can pay less to try to make the loan more competitive with government offerings from the Federal Housing Administration.
Additionally, requirements for a down payment can vary based on a person’s credit score and the concerns by the lender. Borrowers who take on a conventional loan are usually responsible for a number of other fees, including origination and appraisal fees. Most people also take on mortgage insurance, which means these types of conventional loans may come with a high out-of-pocket cost.
Tips For Taking Out A Conventional Loan
Conventional loans fall into two categories: conforming and nonconforming. Conforming loans follow the Freddie Mac and Fannie Mac guidelines. The biggest rule is the loan limit differs depending on the area.
Nonconforming loans are designed for people who are not able to qualify for a conforming one. These usually come into play when the loan amount is higher than the conforming limit. Nonconforming loans also come in a variety of types for different situations.
Have questions or need more info? Contact us today! We’d love to sit down for a few minutes for a free consultation on which type of mortgage we recommend.