As someone new to home buying, here is all you need to know about conventional mortgages. We talk about the pros and cons of conventional mortgages and more.
When you step into the world of real estate and want to buy a new home, you may have multiple mortgage options to choose from. It is like entering a garden with flowers all around. It can be hard to decide which one is the best one, since you have so many options.
Among these mortgage options, you have the conventional mortgage that you can go for. Before you think about pulling it out and smelling it (like you would with a flower), you would want to know what the conventional mortgage has to offer.
This is where you will get your answers.
In the simplest terms, the mortgage loans are divided into two parts
As you can make out from the name, the major difference between the two is that government-backed loans are guaranteed by the government. These mortgage loans include Veteran Affair (VA) mortgage, United States Department of Agriculture (USDA) mortgage, Federation Housing Administration (FHA) mortgage, and more.
On the other hand, conventional mortgage loans are generally obtained through private financial intuitions like banks or private lenders.
Yes, we did not give examples for conventional loans. That is because the conventional mortgage is further divided into 2 categories.
These loans abide by the guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac. One of the major rules set by these enterprises is the loan limit (which is $726,200 in 2023). As the borrower, you can’t exceed that limit for a single loan.
These loans also provide security for the lender as they can resell the loans in the secondary market and reduce their losses.
Some of the common types of conforming loans include
Contrary to conforming loans, you have the jumbo loan, which does not follow the guidelines and limits set by Fannie Mae and Freddie Mac. That means you can breach the loan limit and apply for a higher loan to finance your property.
Jumbo loans can also be called non-conforming loans and they also come under the umbrella of conventional loans.
We have touched upon different aspects of conventional loans and what it offers. But it is not enough information to say, “I want to go for the conventional mortgage,” or “I don’t want to go for the conventional mortgage
So, to make your decision easier, we will see the pros and cons of conventional loans.
Let’s begin our series of pros and cons of conventional loans by talking about the benefits you can look forward to.
Unlike other mortgage loans, you don’t have to wait for a long time. Since conventional mortgages are not government-backed, the vetting process is not usually too long.
Another conventional mortgage aspect that reduces the time is reduced paperwork. You can avoid the frustrating activities of reading tons of paper and signing so many dotted lines.
Multiple Loan Options
Different people have their preferences on how their loan repayment should be structured. That is the freedom you can get with the conventional mortgage, as your lenders are in control.
You have the option to go for a fixed-rate mortgage or choose the adjustable-rate mortgage. Also, unlike a few other mortgages, you can repay your loan without any type of prepayment penalty.
Flexible Terms
As the conventional loan does not bind the lender by the rules and regulations of the government, it allows them to be flexible in their repayment terms.
This includes offering loans for a variety of property types like secondary homes, vacation homes, and more. The lender can also adjust the loan term as per your financial situation, making it easier to repay the debt.
Avoid Mortgage Insurance
There will be private mortgage insurance if the down payment is less than 20%. Are you thinking, “How is that a benefit?”
Well, one of the reasons we are discussing the pros and cons of conventional loans is to show it differs from government-backed mortgage options. In mortgages like FHA loans, you can’t avoid the PMI even if you pay a down payment of over 20%.
That is the advantage you have with conventional mortgages.
We continue our journey toward discussing the pros and cons of conventional loans. After the positives, here are some downsides of the conventional mortgage.
Since the conforming loans comply with the guidelines of Fannie Mae and Freddie Mac, you may face the obstacle of limited finances approved for your next home. If you are eyeing a high-priced property, you may need to go for the non-conforming loan, which is the jumbo mortgage.
You might face a massive upfront investment. A major reason for this is that if you default on the loan, the lenders might suffer a major financial blow. So, your lender might ask you for a high down payment and closing cost to reduce that financial loss if it happens.
If you want to improve your chances of having your conventional approved, make sure you have a good debt repayment history. This includes having a decent credit score of about 650 to 700 and a debt-to-income ratio of below 50%.
That is what your lender might be looking for to know if you will be able to return the loan or not.
As we are comparing the pros and cons of conventional loans and government-backed loans, the interest rates of conventional loans might be higher than the loans which are government-backed. One of the reasons is that the lender doesn’t have as much to do as they do with conventional mortgages.
A conventional mortgage is a loan where the lenders are the be-all and end-all. Now that you know the pros and cons of conventional loans, we have a question for you, “Are You Ready?”
We meant, are you ready to use a conventional mortgage as your money for financing to buy your next property? If so, HAR will help you find your dream property. We are a Texas-based real estate that doesn’t only convert individuals into homeowners. We make them happy homeowners.
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