When researching loan types for your home purchase, there is no doubt that the conventional loan is one of the first on the table. This is, on average, the most common loan type used when making a real estate purchase.

Basically, a conventional loan is a mortgage type that is not back or insured by the government (like VA and FHA are). The mortgage insurance is typically carried by the borrower. The loan itself is backed by private lenders. Due to these factors, this mortgage type can be difficult to get approved for.

Benefits of a Conventional Loan

The reason so many flock to this loan type is in its inherent benefits. These benefits include:

  • Lower Interest Rates
  • Downpayment Flexibility
  • Expedited Processing
  • Varied Term Length Options
  • Lower Priced Mortgage Insurance Options

 

Things To Consider

Because these are privately funded mortgages, the lender assumes all of the risks. If the buyer defaults on the loan the lender will typically recoup their finances by selling off the property. This typically takes place through foreclosure or short sale.

Lenders will also want to see solid credit scores with an established stream of income that can cover the mortgage payments. Some conventional loan offers include down payments as low as 3%, but having 20% or more down can help you avoid having to pay mortgage insurance costs.

Conventional Loan Types

There are two types of conventional loans, conforming and non-conforming.

Conforming Conventional Loan

A conforming conventional loan must meet the guidelines set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). These government enterprises buy mortgages from lenders. In this, they have a max loan limit established to qualify.

Non-conforming Conventional Loan

If the loan required to purchase your property goes beyond this limit, you then have to seek a non-conforming conventional loan (jumbo loan) solely carried by a private lender.

It is best to talk with your lender to see what your area limits are and which option will work best for you.

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