Conventional Loans

What Makes a Loan a Conventional Loan?

A fixed rate or adjustable rate mortgage (ARM) loan is considered a conventional loan if it has no federal government backing. FHA and VA loans are examples of mortgage loans that have government value and these types of loans are called government loans. With a conventional loan, you will have to go through a regular bank, or your local credit union instead of through government supported organizations like Freddie Mae and Freddie Mac.

What Does a Conventional Loan Require?

If you want to get a conventional home loan, you will need to have a significant amount of money saved since they do require a higher down payment. Conventional loan requirements also include a high credit score which can make it difficult for you to qualify for one of these loans if you have ever had a problem with your credit or if you have not simply built up enough credit. Furthermore, a lender might also require you to get private mortgage insurance if you borrow more than 80 percent of the home's value or the purchase price, a term known as loan-to-value ratio.

Conforming vs Non-Conforming Loans

The United States government has put guidelines into place related to conventional loan requirements and other loan requirements. Loans that follow the guidelines set forth by the government sponsored entities, Freddie Mae and Freddie Mac, are considered conforming loans and loans that do not follow these guidelines are called non-conforming loans.
Non-conforming loans that go over the limit set by conforming guidelines are usually referred to as jumbo mortgages. These are generally used for the purchase of luxury homes and banks consider them riskier, which means that you can expect the interest rate on these types of loans to be higher. These loans come in options that include fixed and adjustable rate mortgage programs.

Government Loans

If a conventional loan is not a good option for you, then you will want to look at government loans. These loans are insured by the government and are designed to help people with lower incomes purchase a home. Furthermore, they can be obtained through a large number of lenders and it is a good idea to examine these loans to see if you can qualify for them.

FHA Loan

The FHA loan is the most popular type of loan when it comes to government loans. This loan is insured and guaranteed by the Federal Housing Administration, and requires a much smaller down payment than a conventional loan. If you go with this loan, you should plan to pay for mortgage insurance as it is required.

VA Loan

The U.S. Department of Veterans Affairs backs the VA loan which benefits anyone who has served honorably in the military. These typically involve lower down payments and lower mortgage payments to assist current and former military members in purchasing a home.

USDA Loan

The U.S. Department of Agriculture backs this loan, which helps people in rural areas purchase a home with no money down. These loans are 100 percent financed.