Traditionally, a conventional home loan differs from an FHA home loan or VA home loan because of the lack of government backing that bolsters the loaning process. While it is true that a vast majority of conventional home loans are honored through private lenders and free-enterprise loaning companies, it is important to note that some conventional loans still have the added security of being supported by the two major loan enterprises that are indeed sponsored by the US government: Freddie Mac & Fannie Mae. Delving further into a comparison of running counterparts to VA or FHA home loans, a conventional loan does pose some substantial benefits worth exploring. That’s not to say that a conventional loan is superior to an FHA home loan or VA home loan. In fact, there are some inherent disadvantages associated with conventional lending versus a loan acquired through VA loans or FHA loans that warrant mention and invite additional scrutiny.
By and large, a conventional home loan is most applicable to homebuyers that enjoy a favorable credit rating (630+), positive debt-to-income ratios (less than 43%), and a down payment of at least 3% of the home’s purchase price. Granted, many of these loan parameters are subject to change and can vary from lender-to-lender and homebuyer-to-homebuyer in many instances. However, they are still representative of the loan requirements set forth by the two aforementioned government-backed entities (Fannie Mae & Freddie Mac) that contribute to the conventional home loan industry. How this is preferable to an FHA or VA home loan can differ depending on the amount being loaned and lending/payment history of the loan’s recipient but suffice to say that many conventional loans can save money on a monthly mortgage payment and can often forgo the need of private mortgage insurance (PMI). Additionally, most conventional loans have the added bonus of not being restricted solely to either a fixed-rate mortgage or an adjustable-rate mortgage; thus enabling more flexibility, home loan options, and monthly financial commitments being adhered to by homebuyers & homeowners alike.
Benefits Of Conventional Home Loans
While there are several similarities between conventional home loans aimed at refinancing a property and those that are offered through other means, the most tangible difference is apparent when one considers the “backing” or endorsement of each of the home loans, respectively. For example, a conventional home loan that is obtained for home refinancing does not have the safeguard of governmental support as those obtained through the FHA, VA, or USDA. Initially, that may seem worrisome to many would-be borrowers seeking to refinance their home through conventional home loan refinancing methods, however, it does afford certain benefits that are not immediately obvious; such as reduced down payment requirements, lower interest rates, and reduced home loan terms.
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