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Conventional Loans

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When looking for a mortgage to buy a home, you'll be met with many options. There are several different types of mortgage loans available to you – fixed rate, adjustable rate, and balloon mortgages are just a few of them. Conventional loans are another type. Though it may be confusing to sort out the different mortgages, this guide will explain conventional loans and their pros and cons.

What is a Conventional Loan?

A conventional loan is essentially a mortgage that is not guaranteed or insured by the federal government. Almost any type of loan, including those mentioned above, can be a conventional loan.

Conventional loans differ from the mortgage programs offered by the government’s Veterans Administration, Federal Housing Administration, or Rural Housing Service. Even though they aren’t part of a government organization, most conventional loans still fall under the oversight of government-sponsored enterprises like Fannie Mae or Freddie Mac.

These corporations buy and sell conventional mortgages and set the maximum loan amounts and other borrower requirements.

A conventional loan can either be fixed rate or adjustable rate. With fixed rate, the interest rate will remain the same throughout the term of the loan, while the interest rate for an adjustable-rate mortgage will change based on market conditions. Conventional loans often have better interest rates than non-conventional loans, as long as you can pay the often-required down payment of 20% of the value of the home. By paying such a large amount up front, you will have a relatively low interest rate for the entire term of your conventional loan. If you can’t afford a 20% down payment, you can still pay less for a conventional loan, though you’ll likely face a higher interest rate.

The Pros and Cons

Now that you know what a conventional loan is, you’ll need to determine whether it is the right option for you. There are some clear pros and cons to getting a conventional loan, so make sure you fully consider these before deciding on getting one.

The Pros:

  • Since conventional loans are handed out by a government-sponsored organization, and not directly by the government, there are fewer restrictions and less government red tape. Thus, you can procure the loan a lot faster.

  • Along the same vein, lenders may be more flexible in the conditions of the loan. You might be able to negotiate more to get out of paying certain fees or put up collateral other than the property being mortgaged. If there are any other financial concerns, the lender may be more willing to help you out than lenders providing government loans.
  • When the property is appraised, the home will have to meet the lender’s guidelines rather than the stringent standards of the government organizations.

  • Since conventional mortgages usually require a higher down payment, you can build home equity a lot faster.

The Cons:

  • Though interest rates for conventional loans may be lower, the rates are set by the individual lender and aren’t as well regulated as those offered by the government organizations.

  • As mentioned above, conventional loans often require a large down payment.

  • You will need to have excellent credit to qualify for the loan and to get the best interest rates.

  • Some buyers might only qualify for conventional loans with a 90% loan-to-value ratio (which determines how much you can borrow, based on the value of the home and the amount of the loan), leaving them to pay the rest of the amount themselves.
A conventional loan isn't for everyone. Since they aren't government loans, there is more flexibility as to what the lender can offer you. Along with that independence, though, can come high interest rates and large down payments. Still, depending on your financial situation, a conventional loan can pay off in the end.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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