With the continued growth of the real estate and home mortgage industries, lending institutions are acclimating to the changes by developing new ways of offering home loan deals. A good number of these new deals are guaranteed by the government or backed up by federal–controlled agencies. However, despite the increase in available loan options, conventional loans are still among the top choices of home buyers and the most recommended by realtors these days.

Conventional loans are the more traditional type of loans offered by banks, credit unions, and mortgage finance institutions. These loans are not insured by or part of any government programs. Therefore, they adhere to stricter standards and requirements than the government-supported alternatives.

Conventional mortgages have two distinct categories: conforming and non-conforming loans. Conforming mortgages follow the guidelines and loan limits set by Fannie Mae and Freddie Mac. The loan rates are either adjustable or fixed, while the loan cap depends on which state the loan takes place. Non-conforming mortgages or “jumbo loans,” on the other hand, exceed the set loan limits. They are also riskier and less common nowadays.

Advantages of Getting Conventional Loans

Most home buyers prefer conventional home loans because they offer a more competitive interest rate and better loan terms. Those who have stellar credit scores can even negotiate for more favorable conditions, resulting in additional savings on the part of the borrower. Since they don’t require any government sanction, conventional mortgages undergo a less complex approval procedure and are processed faster.

Another advantage of conventional loans is the flexibility and freedom they present to the home buyers when it comes to selecting the property. The borrowers have the liberty to go for a fixer-upper if they want to – something that they cannot do with an FHA loan because of its stern appraisal guidelines.

Compared to the 3.5% down payment of the government-insured FHA loans, most conventional loans require 20% of the home purchase price. However, they make up for it by saving the buyer from paying costly Mortgage Insurance Premiums(MIP) for the life of the loan, which is the case for FHA mortgages.

If a 20% upfront payment is too much, there are also low-down payment conventional loans available. Although a MIP is also needed, the insurance payments for low-down payment conventional loans cease after 22% of the equity has been covered.

Qualifying for Conventional Loans

To qualify for conventional home loans, the borrower must have a FICO credit score of 620 or more and should provide a proof of stable monthly income. For most lending institutions, the total costs of the mortgage - taxes and insurance included -should not exceed 28% of the borrower’s gross monthly income.

Of course, the home buyers also have to prepare the amount needed for the down payment, which may range anywhere from 5% to 20% depending on the type of conventional loan availed.

Overall, conventional home loans are the best and most attractive option for people who have good credit standing and the money to spare for the initial payments. Lending institutions are more than willing to extend their assistance to those who meet their requirements.

By: Karissa