What Is a Conventional Loan?
If you are looking to buy a house, you have probably heard of a conventional loan. But what is a conventional loan? This type of loan is not backed up by the government, meaning they are offered by private lenders such as banks and credit unions. Conventional loans can be conforming or non-conforming.
A conventional loan or conventional mortgage, as mentioned, is not backed by a government entity, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Borrowers can get this loan through many different lenders, including banks, credit unions, and mortgage companies. The biggest advantage conventional loan brings is that it requires a lower down payment in comparison to other types. So, what is better, FHA vs. conventional loan? Well, it all depends on personal needs.
How Does a Conventional Loan Work?
If you are on the lookout to buy a home, you are probably considering taking out a conventional home loan. Before you even take out this loan, there are some documents you will need to provide to the lender in order to get qualified. These include your income, assets that you own, and all the debts, if you have any. After the lender goes through all the documents, based on those factors, the interest rate for the loan is going to be set. Conventional loan interest rates can be higher or lower depending on how you qualify.
What Are the Different Types of Conventional Loans?
This type of loan can be a great option for borrowers to get the needed money in regards to financing a property or even renovating one. Conventional loans have three main types to them.
These include fixed-rate, adjustable-rate, and introductory rates. Each one of them has its own set of pros and cons, so it’s important to understand them before deciding which one to take.
When it comes to fixed-rate loans, they are the most common type and have a set interest rate that you can’t change. This can come in very handy since you will know exactly for how long you will need to repay back the loan, but overall it can be expensive if interest rates go up after you’ve taken out the loan.
An adjustable-rate loan, on the other hand, has a fixed interest rate in the beginning, but the rate can go up or down depending on market conditions. This can be very helpful to have since you will pay less in the beginning, but it can be very risky since you could end up with a higher interest rate than you wanted.
On the other hand, introductory rates are lower than regular rates for a limited period of time. This can prove to be good if you need the money fast, but you don’t want to pay more in interest later on.
It’s important to know that each one of the conventional loan types comes with its risks and benefits, so do your research before making a decision about which one is the best for you.
Conventional Loans: Benefits and Drawbacks
Like with any other type of loan, conventional loans come with some benefits and setbacks as well.
Here we will give you some pros and cons.
- Lower interest rate
- No prepayment penalties
- Flexible terms
Now that we listed some benefits let’s take a look at some downsides.
- Higher fees
- High origination costs
We mentioned some of the benefits that conventional loans bring, so let’s explain them a bit more. The biggest benefit is that they come with lower interest rates in comparison to other loans. Also, the biggest advantage you have with this loan is that if you repay it back earlier, you will have no penalties. Another great thing associated with conventional loans is their flexible terms. This is amazing thins since you can afford your house sooner and as well pay the loan back faster.
Even with all the good things, there are some downsides to them. The first one being that even if you have lower interest rates, these loans come with high fees. On top of that, they have high origination costs, which means you will have to put more money as your down payment. This can be a bad thing if you don’t have enough money saved up. Lastly, if you are unable to repay back the conventional loan, you will face significant penalties which can impact your credit score.
What Are the Requirements for Conventional Loans?
As we mentioned before, this type of loan is not backed up by the government. Instead, they are issued through private lenders like banks or credit unions. With that said, there are some requirements you need to meet in order to get a conventional loan.
The first and the most important one is that you need to have a good credit score. Your credit score is based on your credit history, which includes the payments that you have made on your bills and the types of loans that you have taken out in the past.
Another requirement is that you need to be able to afford the monthly payments. If you have bad credit, interest rates on conventional loans can be quite high, so make sure you can afford the payments even if your income decreases over time.
And the final requirement is that you must own your home. Many banks will not offer this loan to someone who does not own their home.
Now that you know the needed requirements make sure you contact your financial advisor before taking out a loan.
Is a Conventional Loan a Good Option?
Conventional loans are a good fit for people who are looking to buy a house and live in it for a long time. This way, people can choose a fixed-rate loan and know exactly how big their monthly payments are gonna be. On the other hand, if you are looking to buy a house for a short time and then resell it, the best choice for you is an adjustable rate loan.
So, in other words, conventional loans can be a good option either way, but it all depends on your needs and what you are looking for. Also, you can use a calculator to see how big your monthly payment is going to be for any type of conventional loan so you don’t go over your financial limits. You can find these calculators online or contact your financial advisor.
At the end of the day, if you choose to go with this loan, make sure you do your research before.
In this article, we talked about the conventional loan and if this is a good option for you. We explained the benefits and downsides and as well what they can bring to your financial situation.
If you are looking to buy your dream house that you always wanted, conventional loans can help you do that. This type of loan has different types to it, so either if you are looking for your forever home or a house to just resell, a conventional loan can help you with that.
With all of that said, we hope you find the loan that suits you the best, but before that, make sure you do your diligence and contact a financial advisor to help you.