Posts Tagged ‘conforming loan’

Pros of a conventional mortgage loan

A conventional mortgage loan is a type of home loan that meets certain standards set by the United States government. These type of home loans however are not guaranteed or insured by the government. conventional loans are basically any loan that is not an FHA loan or a VA loan. About 35% to 50% of mortgages each year are conventional mortgages.

Conventional mortgages allow for more financing options over VA and FHA loans. Fore example not only do they offer fixed rate mortgages but there are also various adjustable rate mortgages (ARM) and biweekly payment options available.

Because conventional loans have less strict guidelines they offer many other advantages such as underwriting flexibility, cheaper loan fees, less collateral, more lenient appraisal guidelines, and possible lower closing costs.

If a lender decides to keep the loan in their own portfolio they can offer more underwriting flexibility. Since the loan won’t be sold in a secondary market those guidelines won’t have to be met. This makes getting a loan easier with less than perfect credit.

Lenders may also discount certain loan fees or even waive them in certain cases. Since the lender will be keeping your loan they may discount loan fees in order to get your business.

Conventional loan lenders will sometimes let you use other items in the house as collateral. For example including appliances and furniture may be an option.

FHA and VA loans require strict appraisal guidelines. Conventional loan appraisals are much more flexible and only have to meet the lenders restrictions.

Finally, sometimes lenders will pay a portion or all of the closing costs of a conventional loan in exchange for a slightly higher interest rate. This allows someone who doesn’t have a lot of cash on hand to still purchase a home with less out of pocket money.

As you can see there are many advantages to conventional mortgage loans. Before you decide which type of loan to choose review all of your options. Everyone has a different financial situation so a conventional loan may not be your best option. Research other types of loans before making the final decision.

Conventional loan

Conventional loan defined
 A conventional loan is basically any mortgage loan that is not insured by the federal government or the FHA (the Federal Housing Administration). A conventional loan was the first type of traditional mortgage loan made by lenders. It was basically a fixed rate mortgage for the entire period of the loan. Lenders basically loaned the money to borrowers and the loan was kept open until the loan was paid in full. It was a great way for the borrower to create a relationship with the lender, but often times weren’t the best financial move for lenders. If interest rates rose, lenders were stuck receiving a lower return rate on their money.

Types of conventional loans
There are many types of mortgage loans that are considered conventional loans. A few examples include conforming loans, nonconforming loans, and jumbo loans. A conforming loan is a mortgage loan that conforms to GSE guidelines. Nonconforming loans fall outside the GSE guidelines because of bad credit, lack of collateral backing the loan, or the loan is over a certain amount of money. Finally, a jumbo loan is a loan that large to be financed by normal mortgage trading companies. This amount is currently just over $400,000.

Pros and Cons of Conventional Loans

Pros

• Lenders will be more flexible with lending fees
• The lender may take into consideration other collateral other than the property being mortgaged
• A lender may consider other personal property included in the property as part of the home value
• Appraisals will be more lenient
• The lender may self insure the loan
• A higher interest rate may be considered in exchange for lower closing costs

Cons

• Usually require larger down payments
• The lender sets their own interest rates
• Though lenders can be flexible with lending fees they can also charge more
• There may be some fees associated with paying off the loan early
• Require PMI if the LTV (loan to value) is greater than 80%
   

Other mortgage loan options other than a conventional loan

FHA loans are non-conventional loans. FHA loans are insured by the federal government and have many advantages over conventional loans. FHA loans usually require lower down payments, have more flexibility when it comes to the borrowers credit scores, and have lower PMI or private mortgage insurance.