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2014-12-08 15:58:18
What is a Conventional Loan?
Continuing our weekly series, we take an in-depth look at conventional loans.

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Background:

Conventional loans carry no government insurance or guarantee. The loans are secured by private mortgage insurance (MI) if the down payment is less than 20% of the value of the property. Because there is no government backing, conventional loans normally require a higher down payment and may carry higher interest rates than government loans.

 

Conventional loans are split into two categories: conforming and non-conforming.  Conforming loans follow the terms and conditions set forth by Fannie Mae and Freddie Mac.  Non-conforming loans do not meet Fannie Mae/Freddie Mac guidelines, but are still considered conventional.  Jumbo loans have a dollar value above conforming limits and usually have a higher interest rate.

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Pros

Although not as low as government loans, down payment requirements on conforming, conventional loans are low at 5%. Conventional loans provide financing for a wide range of loan amounts and are the only option for loans above the maximum loan limits for government and conforming loans.  There are no occupancy restrictions, so are the financing of choice for real estate investors and owners of vacation homes. Borrowers have a selection of fixed- and adjustable-rate options.

 

Conventional loans may be quicker and require less paperwork than government-backed loans. Appraisers are not required to be certified by FHA.

 

Cons

Higher down payment requirements and closing costs that may not be rolled into the mortgage require borrowers to have more cash on-hand to complete the transaction. Borrowers are required to have a good-to-excellent credit history.  Conventional loans require a longer waiting period after an adverse credit event, like a foreclosure or bankruptcy.

 

Financing Options

There are a number of conventional financing options.

  • Transaction Types: purchase, refinance and renovation
  • Property Types: Single-family residences, 2-4 units, PUDs, condominiums, and manufactured homes
  • Interest Rate Types: 10- to 30- year fixed-rate and 1-, 5-, 7-, and 10-year adjustable rate
  • Occupancy Type: Primary residence, vacation home and investment property
 
 
 
 
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