What Are Conventional Loans?

Conventional Loans

What Is A Conventional Loan

A conventional loan is a mortgage loan that is not insured or backed by the federal government. It is instead backed by private lenders, and any insurance is paid by the borrower.  Conventional loans are the most common loan type, much more than government-financed loans. Though conventional loans offer the buyer more flexibility, they carry more risk because they aren’t insured by the government making them more difficult to qualify for.

What Is The Difference Between Conventional and Government-Backed Loans?

Government backed loans include options like FHA loans and VA Loans. FHA Loans are backed by the Federal Housing Administration, and VA loans are guaranteed by the Veterans Administration.

With an FHA loan, the required down payment is 3.5% and the borrower must pay mortgage insurance as part of their monthly payment in case you default on your loan.  To qualify for a VA loan you must be a current or previous member of the United States Armed Forces or be an eligible surviving spouse. VA loans require no down payment, but a funding fee of between 1-3% of the loan amount must be paid.

The difference between these programs and a conventional loan is that if the borrower defaults, the lender is at risk. If you can no longer afford the payment, the lender will try to recover as much of the remaining balance as possible by selling the house. Because of this risk, you are required to pay private mortgage insurance on a conventional loan if you put more than 20% down.

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What Are Different Types of Conventional Loans?

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

Conforming Conventional Loans

To be considered a conforming conventional loan, the loan must meet guidelines set by Fannie Mae and Freddie Mac; government sponsored entities that purchase mortgages from lenders.

One of the most important guidelines is the loan limit. The current loan limit for single unit properties is $453,100. In certain high-cost area the loan limit can increase to a maximum of $679,650.

Non-conforming Conventional Loans

Loans that exceed the loan limit are considered non-conforming. A non-conforming conventional loan is also known as a jumbo loan and is not purchased by Fannie Mae or Freddie Mac, but instead funded by lenders or private financial institutions.

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Benefits of A Conventional Loan

There’s a reason conventional loans are the most popular type of mortgage loan. It has several features that are borrower-friendly such as:

  • Low-Interest Rates
  • Fast loan processing times
  • Diverse down payment options, can be as low as 3% of the sale price
  • Various term lengths of fixed-rate mortgages that range from 10 to 30 years

Because there are so many different options, you must decide what fits your situation best. How much you can put down, how long you want your term to be, and how much house you can afford are major factors when deciding what type of mortgage you want.  

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