You may have heard about conventional loans and wonder if this type of loan is right for you. It’s important to know what types of conventional loans are available and how they differ from other loan products.
This article will provide insight into the seven types of conventional loans and help you make an informed decision.
Buying a house can be overwhelming, but it doesn’t have to be. Understanding the different types of conventional loans will empower you to make the right financial choice for your individual needs.
What is a Conventional Loan?
A conventional loan is a type of mortgage that isn’t guaranteed or insured by the federal government. Instead, it’s secured by private lenders and investors. This type of loan is typically used to purchase a home, finance a renovation project, or cover other large expenses. It can also be used to refinance an existing mortgage.
Conventional loans are further divided into two categories: conforming and non-conforming. Conforming loans adhere to the standards set by Freddie Mac and Fannie Mae, which are two government-sponsored enterprises (GSEs). These loans have stricter requirements for credit score, debt-to-income ratio, and down payment than non-conforming loans do.
Non-conforming loans don’t meet the criteria set by GSEs and usually require more documentation from borrowers. They often come with higher interest rates and may require a larger down payment than conforming loans do. However, they can be beneficial for those who don’t qualify for a conforming loan because of their income, credit score, or other factors.
Benefits of a Conventional Loan
Conventional loans offer several advantages. Generally, they have lower interest rates than other types of loans, such as FHA or VA loans. Additionally, they require a lower down payment and less stringent credit requirements than many other loan types. This makes them an attractive option for those who may not qualify for other loan programs.
Another advantage of conventional loans is that they are easier to refinance in the future. Many borrowers can benefit from refinancing their existing conventional loan with better terms or a lower rate. Refinancing is also often simpler with this type of loan since it does not involve any government agencies or insurance companies.
Overall, conventional loans provide borrowers with low-interest rates, fewer restrictions on credit scores and down payments, and the ability to refinance more easily in the future. This makes them an attractive option for those looking for a mortgage or home loan.
1. Conforming Loans
Conforming loans are mortgages that adhere to the guidelines set by two agencies: Fannie Mae and Freddie Mac. These organizations buy and sell mortgages on the secondary market, so lenders must meet their requirements in order to be eligible for sale. They require a certain credit score, loan-to-value ratio, debt-to-income ratio, type of property, and other criteria.
Conforming loans usually have lower interest rates than non-conforming ones because they are considered less risky for lenders. Borrowers who meet all of the criteria can qualify for a conforming loan with as little as a 3% down payment, though 5% is often recommended.
The benefit of conforming loans is that borrowers can take advantage of competitive interest rates while still being able to access traditional financing. It also allows them to purchase a home with less money upfront.
2. Nonconforming Or ‘Portfolio’ Loans
Nonconforming or “portfolio” loans are those that don’t meet the standards of conventional loans. These loans may be offered by smaller lenders, such as credit unions and community banks, and they can offer more flexible terms.
These nonconforming or portfolio loans come with risks that must be weighed carefully before taking on any kind of debt. Interest rates tend to be higher, there may be additional fees associated with these types of loan products, and borrowers must demonstrate their ability to repay the entire loan amount over time in order to qualify.
3. Jumbo Loans
Next, let’s examine jumbo loans. These loans are larger than conventional loans, and they come with higher borrowing limits – typically over $510,400. Because of the larger loan amount and the risk associated with them, lenders often require a higher down payment and a higher credit score than they do for conventional loans.
Jumbo loans can be used for either purchasing or refinancing a home and have variable or adjustable-rate options available. Additionally, you may be able to finance up to 95% of a jumbo loan if you choose an adjustable-rate mortgage (ARM).
Overall, jumbo loans are best suited for those who need to borrow more than what’s allowed with conventional loans. It’s important to keep in mind the additional requirements that come along with this type of loan before deciding if it’s right for you. Make sure to shop around and compare different lenders’ terms when looking into these types of financing options.
4. Fixed-Rate Loans
Fixed-rate loans are one of the most common types of conventional loans. These are loans that have a set interest rate that remains unchanged throughout the duration of the loan. This means that borrowers never have to worry about their payments changing due to fluctuating interest rates.
The main advantage of fixed-rate loans is that they provide financial stability and predictability in terms of payments. There are several different types of fixed-rate loans, including 15-year mortgages, 30-year mortgages, and adjustable-rate mortgages with a fixed initial rate period.
The downside to fixed-rate loans is that they often come with higher interest rates than other types of conventional loans. This can make them more expensive over time, especially if prevailing interest rates fall after the loan has been taken out. Additionally, borrowers may not be able to take advantage of lower rates when they become available.
5. Adjustable-Rate Mortgages (Arms)
ARMs have interest rates that adjust periodically, indexing off an established benchmark such as the LIBOR or prime rate. They typically start with a low fixed rate for a specific period of time, usually five to ten years.
After that initial period is over, the interest rate will periodically adjust based on market conditions. These types of loans offer benefits such as lower initial payments and more options for people who plan to stay in their homes for a shorter period of time.
However, ARMs can also be riskier than fixed-rate mortgages due to the potential of rising interest rates. If rates go up significantly after the initial fixed period, borrowers may find themselves unable to afford their monthly payments and face foreclosure. It is important for borrowers to understand this uncertainty and weigh the risks before opting for an ARM loan.
6. Low-Down-Payment And Zero-Down Conventional Loans
Low-down-payment and zero-down conventional loans are two types of traditional mortgage loans. These loans allow buyers to qualify with a lower down payment or no down payment at all. Low-down-payment conventional mortgages usually require a down payment of 3% or 5%, while zero-down conventional mortgages require no money out of pocket from the buyer.
The benefits of low-down-payment and zero-down conventional loan programs include:
- Greater access to homeownership
- Flexible credit score requirements
- Lower monthly payments when compared to FHA loans
However, there are some drawbacks to consider when looking into these loan types, such as higher interest rates than other loan options due to the risk assumed by lenders; stricter qualification criteria which can make it harder to get approved; and a limited number of available loan programs with different terms and conditions.
- Non Qualified Mortgages
With conventional loans, borrowers may also qualify for nonqualified mortgages (Non-QM). These loans are offered by private lenders and are not subject to the same stringent rules as qualified mortgages.
Non-QM loans offer more flexibility for borrowers who have difficulty proving their income or creditworthiness. They can be helpful for borrowers who have had a recent job change, experienced financial hardship, or are self-employed. Additionally, these types of loans often come with lower down payment requirements than other conventional loans.
These types of nonqualified mortgages may come with higher interest rates than qualified mortgages due to the additional risk lenders take on when making them. Borrowers should carefully consider all their options before choosing a Non-QM loan to ensure they are getting the best rate possible for their particular situation.
Conclusion
In conclusion, these seven types of conventional loans give borrowers a wide range of options to fit their individual needs. There is something for everyone! Furthermore, conventional loans have advantages over government-backed mortgage programs as they generally have fewer restrictions and require less paperwork, making them easier to obtain.
If you’re considering an alternative mortgage loan option, contact Sprint Funding today, and our experienced team of advisors will be able to assist you through every step of the process. Sprint Funding strives to ensure that our clients get the best rates and terms available on their home purchases or refinance loans.
