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.
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.
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.
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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