How Conventional Loans Differ from Government Backed Loans

conventional loans

Conventional loans are debt instruments that are not backed by a federal agency such as the Veterans Administration, the Rural Housing Service or the Federal Housing Administration. Loans that are conventional loans tend to be conforming, as they stay within the guidelines established by Freddie Mac and Fannie Mae. Loans that are non-conforming do not comply with the Freddie and Fannie qualifications. A Conventional home loan is not insured by a government agency. Conventional Home Loans are loans granted regional banks and are kept on their portfolio until sold or paid.

Conventional loans were made by local lenders and were the first type of traditional mortgage loans. There are a many benefits that conventional loans offer borrowers as they tend to be more flexible. Some lenders have the option to retain small loans in their in-house portfolio, thereby allowing further underwriting to occur since the loan will not be required to satisfy secondary market rules. Lenders may open to negotiating or perhaps even eliminating fees associated with the loan. Moreover, the lender can also accept collateral and or other pledged assets in conjunction with the actual mortgaged property.

Other positive attributes of a conventional loan is a lenders willingness to finance personal property along with a property loan, such as furniture and appliances. When the loan is kept in a portfolio, appraisals only have to satisfy the lenders guidelines, and avoid the rigorous standards of the FHA. With convention loans sometimes the lender may be open to covering some of the deal’s closing costs as an added incentive. Usually in exchange for this gesture, a higher interest rate is assigned to the loan. That said, when the loan is held in the lenders portfolio, a variety of financing can be accomplished as the primary debt is somewhat hidden.

Following the real estate crisis of 2007, the majority of the complicated and widely used loans of the last 10-years vanished. Folks began looking for simple financial products that they can understand and quantify. Conventional loans began to gain more interest due to their simplicity and easily understood terms. The crisis sparked a general fear amongst complicated financial products, conventional loans started to grow a reputation of being a safe haven product in the loan market. Realistically, the notable difference between a conventional loan and most other mortgage-related products is they are not insured by a federal agency.

Conventional loans by definition are non-GSE loans. Loans that are conventional usually come with various mortgage payment terms offered to the borrower. Home buyers have the option to choose a fixed rate mortgage or an adjustable rate. Adjustable rate loans that are conventional are usually over with a term of five, seven or ten years. Conventional loans that are fixed are normally offered with a term of ten, fifteen, twenty or thirty years.


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