When you are looking for a new home, there are several types of loans you can take out to finance your purchase. These types of loans will vary according to the amount of the down payment you have to make, as well as how high the payments will be and how long they will last. A conventional loan may be your best choice.
Some of the most common types of conventional mortgage loans are discussed below.
Conventional Mortgage Loans: Backed by a Private Lender
The first thing you need to know about conventional mortgage loans is that they are financed very differently than government loans. Unlike FHA or VA loans, conventional mortgage loans are not backed by the Federal government. When you apply for a conventional mortgage loan, you will need to secure the backing of a private lender.
This lack of government backing means that you can’t necessarily count on receiving the same type of guaranteed fixed rate interest for the loan that you would if you were getting an FHA or VA loan. Instead, the fees and rates of interest that you pay on a conventional mortgage loan will vary according to the rules of the lender you obtain the loan from.
How Can You Qualify for a Conventional Mortgage Loan?
Because they are not backed by the Federal government, conventional mortgage loans pose a much higher risk for the lender. For this reason, you will usually have to have a relatively high credit score – above the normal average of 580 – and may also have to meet higher income requirements.
If you are unable to make the standard 20% down payment on the property you are attempting to finance, you may have to enlist the services of a private insurer for your loan. You should know that, if this is the case, you are protected under the terms of the 1998 Homeowners Protection Act which states that, once you have paid 20% of the original value of the property in question, any additional charges you are paying will be null and void.
How Does a Conventional Mortgage Loan Work?
Under the terms of a conventional mortgage loan, you will normally be required to pay the full amount of the loan at a fixed interest rate over the course of 30 years. There are some banks that may be able to offer you a loan with a repayment window of 40 or even 50 years. You can also take out a conventional mortgage loan with a much shorter time period of 15 years.
You May Also Qualify for an Adjustable Rate Mortgage
Another type of conventional mortgage loan is known as an adjustable rate mortgage. This means that the rate of interest you pay is not set in stone. Instead, the rate you pay is synced to the current market rate. There is some uncertainty tied to this type of mortgage, since you can expect your rate of interest to experience some level of fluctuation along with the market rate from time to time.
What Are the Benefits of a Conventional Mortgage Loan?
There are many highly desirable benefits that are associated with getting a conventional mortgage loan for your new home. If your credit is good and you possess a high and very steady income, you may well be able to qualify for the standard 20% down payment. If this is the case, you will find that a private institution can offer you a much lower rate of interest than a government financed FHA or VA loan.
Conventional Mortgage Loans are Quicker and More Efficient
Most FHA loans require that the property you are seeking to purchase meets very strict guidelines of eligibility. These guidelines included price, location, and quality. In contrast to these strict governmental rules, a private lender is much more concerned that you are able to purchase the property and meet their own requirements for paying back the loan you take out.
This means that a private conventional mortgage lender will usually be able to process your loan in a far more efficient and quick fashion than an FHA or VA lender. You should also keep in mind that the higher down payment you are making on a conventional mortgage loan will enable you to build a higher level of equity much faster.