What are Conventional Loans?

The term conventional loan covers any type of home loan which isn’t insured or guaranteed via a government agency. Many conventional loans conform to government-set loan limits as well as income and credit score minimums. Conventional type loans mostly cost low as compared to government-backed mortgages such as FHA loans but the qualification requirements are tougher to meet.

Benefits of conventional loans:

Almost all types of loans other than conventional loans require a heavy down payment. But the conventional loan is the only type that is available even at a 3% down payment. Conventional loans allow most of the borrowers to save money in the long run because there’s no upfront mortgage broker insurance fee and the monthly insurance payments are also less.

Types of conventional loans:

  • Conforming conventional loans:

If the conventional loan is less than the maximum loan amount set by Federal Housing Finance Agency and it meets additional loan standards then it will be called a conforming loan.

  • Non-conforming conventional loans:

If the amount of conventional loan exceeds the loan limits set by FHFA or uses underwriting standards then it will be called a non-conforming conventional loan. A jumbo loan is the most common type of non-conforming conventional loan.

  • Fixed-rate conventional loans:

It implies both conforming conventional loans and non-conforming loans. In a fixed-rate conventional loan, the interest rate stays the same as long as you are having the mortgage. Most buyers pick a 30 year fixed rate mortgage loan scheme, instead of the 15 year fixed mortgage because it usually results in a relatively affordable monthly payment, shorter terms are also available.

  • Adjustable-rate conventional loans:

Adjustable-rate conventional loans are an alternative to a fixed-rate mortgage. Adjustable-rate conventional loans are also called hybrid ARMs. Rates in ARMs usually get adjusted on annual basis, after the initial fixed-rate duration of three, five, seven, or 10 years.

  • Low-down payment conventional loans:

Back in the day to get a conventional loan 20% down payment was needed. Because the borrowers who meet those requirements only have to finance 80% value of their home. This type of conventional loan is also called an 80/20 conventional loan. But during the last few years down payment requirements for a conventional loan have become more flexible than ever before.

  • Conventional loan on 3% down payment:

Home Possible and Home Ready are the two options to get a conventional loan at a 3% down payment. Conventional loans on 3% down payment are also referred to as 3 down conventional loans. In case if you qualify for a 3% down payment through one of these programs you have to finance the remaining 97%.

  • Conventional loans on 5% down payment:

Some borrowers with low credit scores can afford a down payment of 5% to get a conventional loan. It means they need to finance 95% of the total value of the home. This type is also referred to as 5 down conventional loan or a conventional 95% mortgage.

What’s for the ones with a 0% down payment?

Conventional loans on 0% down payment are available but a little hard to get. There are few lenders which often credit unions offer in-house, non-conforming conventional loan programs which feature 100% financing. You should need a financial advice to get it. However, there are special qualification requirements which apply to this. Conventional loans on zero down payment are risky because it will take you a little longer to build equity as compared to any who made a down payment. You have to be more interested.

Disadvantages of conventional loans:

Just like any other thing there are few disadvantages of conventional loans as well. Lenders mostly don’t consider any potential borrowers which have a credit score less than 620. It’s difficult to qualify for a conventional loan and to qualify for a conventional loan with a low-interest rate is even more difficult. Because the lenders are at high risk in conventional loans so they will look closely at your financial history and background. Their investigations are pretty much similar to the requirements for a government-insured small business loan scheme. The other major disadvantage of conventional loans is the requirement of lower debt-to-income ratios. Low income and high debt put private lenders at more risk, that’s why debt ratio requirements are very strict with conventional loans. So you should consider business loan protection insurance, for your business.

Article Author:

Rohma Charlotte

Organisation: Revolution Finance Brokers Ltd 

[email protected]

Date: December 5, 2021