To begin, a conventional loan is a mortgage that is not part of a government program; however, conventional loans interchange with conforming loans. There are two types of conventional mortgages; conforming and non-conforming.
A conforming mortgage follows the guidelines by Freddie Mac and Fannie Mae. Non-conforming mortgages include loans that exceed the loan limits imposed by government-backed agencies, niche products and risky products.
Why do most people choose a conventional loan?
Many choose a conventional loan because conventional loans offer a lower monthly payment. In addition, this loan works well for many; especially if they choose a fixed-rate loan. It is an easier way to budget because the borrower doesn’t have to be concerned about rising mortgage rates.
Reasons why some choose non-conventional loans
Examples of non-conventional loans are FHA loans, VA loans, USDA loans and Jumbo loans. Benefits of non-conventional loans are a payment that is less, an easier approval process, more flexible guidelines for credit scores and a loan that is more forgiving of bankruptcy and foreclosure.
How to qualify for a conventional loan?
Because the government does not back conventional loans, conventional loan borrowers pose a larger risk to those who issue the mortgage. There are three main requirements for a conventional loan; a substantial down payment, proof of a stable income and a good credit score.
Depending on a person’s credit and financial situation, the standard down payment for a conventional loan is often three to 25 percent of the home’s value. A borrower’s income must prove to be stable. In addition, a borrower’s mortgage payments and monthly non-mortgage debts must be within certain ranges. One’s credit score must be more than acceptable. To gain approval, most lenders require a score of at least 620.
What are the benefits of a conventional home loan?
Conventional home loans offer several good benefits; perhaps one of the most prized benefits is that it is a faster home loan; it is not dependent on government approvals. The application process is shorter and less complicated. With a conventional loan you can also avoid mortgage insurance premiums; this is because conventional loans require higher down payments.
In addition, with a conventional loan you may be able to get a better interest rate; this is due in part because private lenders may compete for your business if you are seen to be a good credit risk. It is important to note; before you make a decision to apply for a conventional loan, talk with a few mortgage professionals. Doing the research will help you get the best mortgage possible.
What is pre-approval of a loan?
Pre-approval is a statement given to you by a bank or direct lender stating the total amount that you may borrow for a home. The benefits of a pre-approval are buying power, saving time during the buying home process and will help you to carefully review your financial situation.
To conclude, a conventional loan is a mortgage that is not part of a government program; however, conventional loans interchange with conforming loans. Talk with a lender soon and choose a loan that will best meet your individual needs.