What Are the Benefits of a Conventional Loan?

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According to Financial Web, a conventional loan is any mortgage that isn’t guaranteed or insured by the federal government. This means if a borrower defaults on the loan and stops making payments, the lender isn’t able to collect payment from a third-party underwriter. Conventional loans essentially provide another type of loan product that allows a borrower to purchase or refinance a home. These loans offer borrowers a number of advantages, depending on your credit worthiness.

Lower Fees

  • Fees associated with conventional loans frequently are lower than other loan products because the lender sets these rates. The Federal Housing Authority (FHA), a financial information resource, states conventional loans generally offer lower closing costs than government-backed loan products.

Rates

  • Lenders determine the rates to offer borrowers based on their credit score. A person with a solid credit score is often able to secure a low rate.

Use of Supplemental Collateral

  • The lender may allow borrowers to offer collateral other than the property mortgaged. This is a particular benefit to borrowers with limited access to credit.

Option for Borrower Unable to Obtain Private Mortgage Insurance

  • There are options for borrowers not approved for Private Mortgage Insurance (PMI), which is insurance that protects the lender from incurring a financial loss when a buyer defaults on a loan. To compensate for this, a lender of conventional loans increases the interest rate on the loan to mitigate potential risk.

Alternative for a Cash-Short Borrower

  • Some lenders fund a portion or all of the closing costs needed at settlement and, in return, raise the interest rate of the loan to recoup those funds. While this isn’t an ideal trade-off for all borrowers, it’s an option for those that lack necessary funds to close on the sale of a home.

Pre-Approval Appeal

  • A potential home buyer, pre-approved for a conventional loan, may appear more credit worthy to the home-seller and thus more appealing than potential buyers pre-approved for other loan products. One reason is conventional loans take less time to close than other loan products. Another reason is conventional loans frequently require a higher down payment. Furthermore, conventional loans usually require borrowers to meet stricter qualifying guidelines.

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