Defining Conventional Loan
A loan such as a mortgage can be defined by a conventional loan or it can be defined as a government insured loan. Government agencies such as the FHA typically insure mortgage loans when someone finances a home through a private lender. Such insurance is paid for by the borrower of the mortgage loan. The government pays the larger sum but collects taxes from most homeowners with regular mortgage loans. Since not everyone is going to default on their mortgage (at least not all at once) the aforementioned government agencies can afford to cover the homeowner’s who do.
The Uninsured Or Conventional Loans
There are several different types of loans encompassed under the banner of “conventional loans.” We’re going to go over each of them to give you all the information you need on each of them
Conforming Loans
Probably fifty percent of all conventional loans are considered to be “conforming” loans or mortgages. This is largely due to the fact that they “conform” to the guidelines set forth by Fannie Mae & Freddie Mac. This is two government-backed groups that go to lenders and purchase mortgages from them then auction them off to investors. The sole purpose of this is to make mortgage loans more widely available to everyone. Every conforming mortgage is defined under the term “Conventional Mortgages.”
Non-Conforming Mortgages/Loans
This type of mortgage loan does not conform to guidelines set down by the GSE, hence why they are called non-conforming loans. They are typically larger loans or jumbo loans that far exceed the loan limits proposed by the GSE. While much different than conforming loans that are still considered conventional loans by the federal government.
Portfolio Loans
A conventional loan retained by mortgage lenders and kept on their private books are simply referred to as Portfolio Loans. This is due to the fact that lenders can make their own guidelines for such mortgage loans. These loans are also never sold to investors. Such a mortgage loan from this type of lender might also have added features that even other conventional loans do not. An example? The lender might even allow the borrower to secure the mortgage loan with stocks, bonds, and other investments. This is typically done for borrowers who might not otherwise qualify for a mortgage loan.
Subprime Loans
This is a mortgage loan most offered to borrowers with low or very low credit scores. They come with an added price with higher fees and much higher interest rates. The government has actually created special rules and regulations for subprime mortgage loans. They still are not government-backed loans meaning that they are still conventional loans. Unlike the other three types, subprime loans do have a few drawbacks which we’ll be getting into in a minute.
Getting A Conventional Loan
While not true of all three types of conventional loans, a minimum credit score of about six hundred is a general requirement to get one. Another factor for getting a conventional loan is making a decent down payment of at least twenty percent of the total purchase amount. That is not even remotely a requirement but having PMI or private mortgage insurance is a requirement if you do not have at least twenty percent to put down at closing.
If your credit is not entirely up to par then you might end up with a subprime mortgage loan, which certainly has its cons over pros but if you’re desperate for a house it is a good option nonetheless. If you need more money to secure a loan than you have but have investment assets, then a portfolio is probably the way to go. If you can afford the PMI then you can put as little as three percent down on a home and get a conventional mortgage loan. Ultimately, as long as you meet the requirements established by Fannie Mae & Freddie Mac, then you could conceivably get a conventional loan.
The Pros Of Conventional Loans
Like with most mortgage loans you still have the ability to choose how long you will be paying your loan off, still in fifteen, twenty, and twenty-five-year terms. The shorter the loan period the higher the payments but the quicker it is paid off. The longer the loan payment the shorter the payments. These loans are greatly adjustable rate mortgages, and it shows. Some lenders are even paid off in as little as ten years. Imagine paying off a house in a single decade. This is great if you intend to sell or instead flip the house and get a return investment quickly. The trick if you’re keeping the house is to pay it off immediately. Why? Well, the interest rate is fixed but only for a few years at a low rate. The plus side is that it could go down after that period.
The Cons Of Conventional Loans
Remember what we just said about the interest rate after a few years? Yeah, it can also go up rather drastically. That is one large down for conventional mortgages. It’s still good if you’re flipping houses or just building your credit to sell it and buy another real estate property. Another huge downside is the history of conventional loans in real estate. Specifically, we are talking about subprime loans. Why? They have an extensive and nasty history prior to 2009. There are a few good reasons for why the government began imposing new regulations on subprime mortgages. They were the single cause of the housing bubble bursting in 2009. Banks were handing them out like candy to homebuyers who were not able to afford them. Subprime mortgage loans can be useful but only when used by the right people who know the risks.
Are Conventional Loans For You?
This question is answered by asking yourself several other questions. Is it a portfolio loan you need? This is the one you need to put investment options like stocks and bonds up to secure the loan. A subprime loan would be right if you have a low credit score but a good paying steady job. If you meet the requirements set down by Freddie Mac & Fannie Mae, then you can get a conforming loan. If you want the same type of loan but don’t meet those terms, then you could look at non-conforming loans. Picking the right kind of mortgage loan is essential to go over it with a professional and make sure you get the right one.
