
Many are unaware that there are several kinds of mortgages. One type is conventional loans, which are further subdivided into two, namely: confirming and non-conforming.
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Now, what is a conventional loan, and how does it work? How is it different from other mortgages?
What Is a Conventional Loan?
A conventional loan is a mortgage that the Federal Housing Administration or any other government agency is not guaranteed. It is usually issued by a private bank or mortgage company.
Conventional loans follow the standard set by the government and do not offer the same perks as mortgages guaranteed by the government. A conventional loan will usually have a higher interest rate and let the borrower have more options when deciding on the size and type of mortgage loan.
You can still avail of a conventional loan even if your credit score is 620. Some financial institutions even approve mortgages for those with a credit score of 660, but your interest rate may be steep. Kindly note that the better your credit, the lower your interest is.
One of the benefits of using a conventional loan is paying a down payment as low as 3%. But in general, one will only have to pay a down payment of 10% to 20% when applying for traditional mortgages.
Differences between Conventional and Government-Backed Loans
As mentioned above, government-backed mortgages are guaranteed by the Federal Housing Administration (FHA) or Veterans Affairs. Approved lenders can only issue these loans, and the FHA insures a portion of the unpaid balance of the loans.
If you are applying for this mortgage, you will benefit from the competition between banks and mortgage companies. The lending institutions will compete with each other to get your business. The lender will develop more deals and better rates to attract new customers. You will have more options for loan size and type of mortgage.
Conventional loans may also help you build your credit standing. Once you begin paying your bills and have a good payment history, your credit score will improve, and you may be able to take advantage of government-backed mortgages in the future.
What Are the Benefits of a Conventional Loan?
There is no one-size-fits-all approach to loans. You must know the pros and cons of a conventional loan to make an informed decision. Here are some advantages:
- Low Interest Rates: Conventional loans may have lower interest rates than government-backed mortgages. They are not backed by the government and are issued by private financial institutions.
- Private financial institutions issue conventional loans. As mentioned earlier, these entities will compete for your business. Thus, you get a lower interest rate.
- Higher Loan Limits: Unlike government-backed mortgages that set a ceiling for the loan amount, conventional loans have no limit for loans. The borrower can take as much as the mortgage company can provide.
Final Thoughts
Choosing between a conventional loan versus government-backed loans is a matter of weighing the pros and cons. As mentioned, you must consider your financial situation. Once you have made your decision, reach out to Mortgages by Misty. Call us today at (480) 618-5358 so we can help you buy a home through a conventional loan in Arizona!
Do you know how much home you can afford?
Most people don’t... Find out in 10 minutes.
Today's Mortgage Rates