CONVENTIONAL LOANS

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Conventional Loan

A conventional loan is one with no government ties like those offered with the backing of the Department of Veterans Affairs (VA) or the Federal Housing Authority (FHA). Two types of conventional loans include a secured loan, meaning one with collateral, and an unsecured or signature loan, one based on the creditworthiness and financial condition of the borrower. Secured loans generally are offered at lower interest rates than unsecured loans. In reference to conventional loans, the term applies to mortgage loans and has both pros and cons.

Down Payments

One point on the pro side of a conventional mortgage loan is that equity builds faster because of the higher down payment expected upfront. A con is that the higher down payment makes it more difficult for some consumers to obtain a conventional loan. With the larger down payment expected on a conventional mortgage loan, as much as 20 percent in many cases, you will not be required to have private mortgage insurance (PMI), which can be a plus. Conversely, if the you do not have a significant down payment, PMI will likely be required and you must then meet the requirements of a mortgage insurance provider, which is essentially like applying twice for loan approval. Concerning conventional mortgage loans, down payments may need to be authenticated as belonging to you, showing that you have saved to obtain the loan or that the down payment is a gift from someone and not a loan that person expects to be paid back.

Interest Rates

A con of conventional loans for borrowers with lower credit scores means higher interest rates and fees often become part of the loan terms. The lender may also demand a higher interest rate if it’s allowing the borrower to include part of the closing costs into the loan. Conventional loans may also carry higher interest rates than some government loan programs. We generally offer conventional loans with a choice of fixed or adjustable interest rates, with many having fixed rates for a predetermined number of years. This can be a plus for you. On the downside, adjustable-rate loans can result in fluctuating monthly payments.

Terms and Conditions

A plus to conventional loans is that Banks may be more willing to negotiate terms and conditions than with a government-backed loan where the lender must follow standard guidelines. In addition, a conventional loan, on average, is processed faster than a government-backed mortgage such as through FHA.

Creditworthiness

With a conventional loan, the decision on qualification belongs solely to the bank and there may be fewer restrictions on your personal financial situation than a government-backed loan. On the con side, a bankruptcy or home foreclosure in the past can significantly decrease a potential borrower’s chances of obtaining a conventional loan. Many banks require a long waiting period in which the consumer will be expected to repair credit. Both a pro and con of a conventional loan are that banks consider the applicant’s debt-to-income ratio, the relation between the amount of money required to meet debt obligations each month such as auto loans and credit card payments and the amount of monthly gross income earned. The lower the debt-to-income ratio, the better it will be to process your loan.