What Do I Need to Know About Conventional Mortgage Loans?
Typically there are three ways to finance a home: FHA loans, VA loans and conventional loans. Each subset of loans comes with several options, but none more so than conventional loans. Knowing the ins and outs of the available options with a conventional loan can help home buyers make the best purchasing decision for their budget.
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Credit Scoring
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The interest rate for a conventional loan is based on a credit scoring system. The higher a consumer's credit score, the lower the interest rate. The overall starting point for an interest rate is based on rates set by the federal government, but it is up to an individual lender to decide how much lower, or higher, rates will go when granting a conventional loan.
Insured
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Unlike FHA loans or VA loans, conventional loans are not directly backed by the government. This makes these types of riskier to the lender. Because of this, down payments on a conventional loan are higher, often at least 10 percent of the total sale price, but a consumer has the option to put more money down if he desires.
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Fannie Mae and Freddie Mac
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Fannie Mae and Freddie Mac are the two largest purchasers of conventional loans. These underwriting entities offer banks a margin of protection in the event that the consumer defaults on a loan at a later date and the mortgage goes into foreclosure.
Types
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Conventional loans are classified as either conforming or non-conforming. A conforming loan is a conventional loan that meets the Fannie Mae or Freddie Mac underwriting requirements. A non-conforming loan does not meet Fannie or Freddie requirements and may be classified as a jumbo loan or a balloon payment loan. These loans generally charge higher interest rates or require a large lump sum at the end of a mortgage term. However, even with these types of loans, a consumer has the option to refinance.
Loan Limits
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Government insured loans like FHA or VA have a loan limit on how much they will allow a consumer to borrow, unlike conventional loans. Conventional loan limits are significantly higher and allow the borrower to purchase more expensive properties.
Considerations
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With a conventional home mortgage, a homeowner is likely to move in with equity due to the higher down payments. This can benefit the owner when they sell the property at a later date, allowing them to net a higher profit margin than those using FHA or VA loans with substantially lower down payment percentages.
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References
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