Buying a house is one of the largest investments that you will make throughout your life. This being said, you need to explore every financing option to pick a mortgage that suits you the best.
In the last post, we discussed the ins and outs of a Federal Housing Loan. Today we will be examining a conventional loan and what it entails.
A conventional loan is not created by the government or insured by a government entity and is often referred to as a non-GSE (government sponsored entity) loan. Compared to a federal housing loan, insured by the Federal Housing Administration, conventional loans are established by private entities such as private lenders, banks, credit unions, etc. This loan is usually is fixed in its terms as well as its rate and typically has a term of 15, 20, or 30 years.
Out of most housing loans available, the conventional loan is one of the more popular choices.
The main allure about this loan is that mortgage insurance (also known as PMI) is more inexpensive compared to government loans.Even better, when you put at least 20% of your home’s price down, PMI is not required.
Whereas federal housing loans you have to buy a property that you plan to reside in, with conventional loans you are able to buy a second house or an investment property. Conventional loans also cover a larger variety in the type of housing you live in. With federal housing loans, often condo complexes, apartments, and even some houses are not applicable through federal housing administration financing.
Another great thing about conventional loans is that they are easily available. You can obtain a conventional loan at any bank or lender throughout the country. With federal housing loans, only certain lenders have them readily available, making it a more time-consuming process.
Conforming vs. Non-conforming
Within conventional loans, there are two categories, “conforming” and “non-conforming” loans.
According to Deborah Kearns of NerdWallet, conforming loans follow a set of rules set by Fannie Mae and Freddie Mac who both government-controlled companies help to provide money to the United States housing market.
Meanwhile, a non-conforming loan is for those who don’t conform the guidelines set by Fannie Mae and Freddie Mac because the loan is higher than what is set for the area. These loans are harder to obtain because it proves to be more of a risk for the lender. Those who use non-conforming loans may also have bad credit, a recent bankruptcy, or a high amount of debt.
Shashank Shekar of the balance explains that before you can get a conventional loan, there are qualifications. Below you can find the typical requirements you must possess in order to receive a conventional loan.
- Credit score must be at least 620
- No recent bankruptcy, foreclosure, or short sale
- Your debt to income ratio must be under 45%
- Your housing debt to income must be under 35%
- Must be able to verify at least 2 years of income
- Put a down payment down of at least 5% (depending on the lender, it may be up to 20%)
If you consider yourself as a borrower with great credit and are able to suffice the needs of your private lender, then a conventional loan may be an excellent option for you. Remember to explore all of your options to find the best financing options that suit you and your needs.