Conventional / Unconventional Loans
FHA Loan Advantages
- Low down payment required (3.5 percent minimum)
- Can go as low as 500 credit score (620 minimum for conventional)
- Not limited to 43 percent for debt-to-income ratio (qualified mortgage rule applies for conventional loans)
- FHA loans are assumable
- FHA loans are eligible for ”streamline” refinances
- Shorter timeframe following major credit problems (3 years vs. 7 years for foreclosure and 2 years vs. 4 years for bankruptcy)
- FHA loans typically will have a lower base interest rate than a comparable conventional loan
- Non-occupant co-borrower (relative) may be used for qualifying by blending ratios
Conventional Loan Advantages
- Low down payment required (3 percent minimum)
- Mortgage insurance is required for loans exceeding 80 percent loan-to-value(Mortgage insurance is required on all FHA loans regardless of the loan-to-value)
- Conventional mortgage insurance is only monthly or single premium (FHA is upfront and monthly premiums)
- Conventional mortgage insurance will automatically end at 78 percent loan-to-value (FHA will stay for the entire life of the loan)
- Conventional mortgage insurance is credit sensitive (For FHA, one premium fits all)
- Conventional loans can cover much higher loan amounts (FHA over county limits)
- Even though conventional loans may have higher interest rates, their monthly payments may still be lower
What Is a Non-Conventional Loan?
Conventional mortgages are those products not directly backed by the federal government. For instance, mortgages owned by Fannie Mae and Freddie Mac, two large mortgage purchasers, are loans that feature generally “conventional” or standard lending terms. In contrast, most mortgages backed by the federal government feature a variety of non-conventional lending terms, conditions and credit qualification standards.
Non-conventional Loans
In an effort to encourage homeownership, the federal government insures or guarantees non-conventional mortgage loans through three agencies: The Federal Housing Administration, the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture. All federally backed mortgage loans feature special and, in many cases, relaxed lending guidelines and payment terms.
Qualification Standards
Federally backed non-conventional mortgage loans frequently come with low or even no down payments as well as lower credit score requirements. For example, down payment requirements for FHA-insured mortgage loans can be as low as 3.5 percent. Qualifying credit scores for non-conventional mortgages, however, can be as low as 540, though lenders typically require a 640. Depending on the non-conventional mortgage loan product, interest rates may be higher than conventional mortgage rates.
Eligibility
Not every loan product insured or guaranteed by the federal government is open to every homebuyer. VA mortgages, for example, are only open to eligible military veterans or family members. Mortgage loan products offered by the USDA typically are available to low-income rural homebuyers. The federal government’s main non-conventional loan product, the FHA loan, is open to almost all first-time homebuyers.
Other Non-conventional Mortgages
Any mortgage loan not conforming to traditional and required lending guidelines could be considered a non-conventional mortgage. For instance, some lenders specialize in subprime mortgage loans to credit-challenged or riskier borrowers, and they frequently feature loan or borrower-specific credit terms. Real estate property investors are also another class of borrower in need of non-conventional mortgage funding. Non-conventional mortgage loans not associated with federal government are riskier for lenders and usually include higher interest rates.
Conventional loans & unconventional loans: what’s the difference?
It doesn’t matter if you’re buying your first home or your fourth home, every homeowner will have to answer the daunting question: What home loan do I choose?
The first step you can take is to learn about two basic home loans, conventional and unconventional. Both loan types will have their own advantages and disadvantages to the borrower.
To help you get started, we’ll guide you through the differences of these two popular home loans.
What Are Conventional Loans?
Conventional loans are not secured by an established government program like the Federal Housing Administration (FHA), Department of Agriculture (USDA) or Department of Veterans’ Affairs (VA). Instead, they’re offered by private lenders and will generally follow more strict requirements compared to other loan types.
They’re ideal for borrowers who already have excellent credit. If you are currently at a good economic standing and can provide a larger down payment, the process shouldn’t be hard for you. Although it may be hard to qualify for this loan type, there are added benefits such as flexibility in terms of property that you can purchase and the chance to significantly reduce your mortgage insurance.
Conventional loans will fall under two types: fixed-rate mortgages and adjustable rate mortgages.
Fixed-Rate Mortgages
To put it in layman’s terms fixed-rate mortgages will have an interest rate that never changes. Even if your property taxes start to rise or your homeowners’ premium increases, the monthly payment for your loan will always be the same. If you are someone who is used to consistency, this loan type may provide you with stability and peace of mind.
It’s also common for individuals who are settling down to take interest in a fix-rated mortgage. You may find that a 30 or 15-year fixed-rate mortgage is the perfect fit for you. Overall, your choice to go with a fixed-rate mortgage will come from your current situations or future plans.
Adjustable Rate Mortgages
Typically, homebuyers who plan on relocating in the near future will apply for an adjustable rate mortgage. They’re often swayed by the gleaming feature of having a lower interest rate right off the bat. In other words, your monthly payment will start off more affordable.
Most first-time homebuyers or younger individuals who are advancing in their career will lean toward an adjustable rate mortgage. That way, if you decide down the road that you want to move, you won’t be tied down to a specific loan type. During the introductory phrase of having an adjustable rate mortgage, you won’t have to worry about refinancing. You’ll also have already benefitted from a low interest rate.
What are Unconventional Loans?
As stated before, conventional loans require a higher credit score, lower debt-to-income ratio and larger down payment in cash. In certain circumstances, this cannot always be attained by borrowers. If you find yourself in this situation, you can look into an unconventional loan.
In reference to its name, unconventional loans, are different from most loans. They’re backed by the government or secured through a bank or private lender and ideal for individuals with a lower-income or less than perfect credit.
The only downside comes from the fact that the loan limit is lower, and if you are seeking a home with a high price tag, you will need a larger down payment. Unconventional loans can be broken down into two loan types: FHA loans and VA loans.
FHA Loans
In the event that you don’t qualify for a conventional loan, you may want to consider an FHA loan. Since you now understand that an unconventional mortgage is government-backed, you can see how the loan process will work. If, at any point, you default on your loan and your home’s worth cannot cover the amount, the FHA will take over and repay the lender.
This type of transaction will only happen because the loan is insured, making it apparent that there are less restrictions for FHA loans. This also means that your lender may be able to give you a low down payment.
VA Loans
The second type of unconventional loan is a Veterans Affairs Loans (VA) that must be approved by a lender and is guaranteed by the U.S. Department of Veterans Affairs (VA). The main purpose of a VA loan is to provide military personnel and their families with the ability to finance a home.
To be considered for a VA loan, the individual must be an active duty service member, National Guard member or reservists and meet the service requirements mandated by the loan. Ultimately, the VA will determine the approval of this loan type.
It’s Time to Decide
n the end, it will be up to you, the homeowner, to decide on the best mortgage loan for your situation. But that doesn’t mean you can’t receive help from the mortgage professionals at CONQUEST. If you’re considering a conventional loan or an unconventional loan, Conquest Realty’s broker is available whenever you need us no obligation free consultation. Simply call us at 1-818-445-2336 or fill out our online application and one of our customer service representatives will get in touch with you.