If you're about to buy a home, you might have stumbled upon the two types of loan called the "conventional loan" and the "non conventional loan". But what exactly is the difference between the two? And which one is the better option for you?
Conventional Home Loans
Conventional loans are the kind of mortgages that are not secured by the government. These loans are also called "conforming loans" since these loans conform to the guidelines that has been set by Fannie Mae and Freddie Mac, the two biggest conventional loans investors. The said guidelines include a minimum credit score requirement of 620, a debt to income ratio of 36%, and a maximum loan amount of $417k. You may have a higher debt to income ratio as long as you can compensate it with other requirements such as an exceptional FICO record.
Furthermore, conventional loans ask for a 20% down payment plus closing costs fee to be paid upfront. In case this down payment requirement is not met, the borrower would have to buy a private mortgage insurance to protect the lender.
There are two kinds of conventional loans, the "fixed rate loan" and the "adjustable rate loan". The "fixed rate loan" gives a borrower a fixed mortgage rate that does not change over the loan's life. The "adjustable rate loan" on the other hand, is the loan type that that allows for interest to rise and fall depending on the market's behavior.
Before, a 5% minimum initial payment was required for conventional loans. However, a recent program is already allowing people to get a home loan with only a 3% down payment.
Non conventional Home Loans
The non conventional loans are the type of loans that are backed by the government. Typically, the non conventional loans are more flexible for buyers and are more appropriately offered to people who may not be able to meet the guidelines set by conventional loans.
The two types of non conventional loans are the FHA loan and the VA loan. The FHA loan is less strict when it comes to application requirements compared to conventional loans. This loan type however, requires a borrower to pay for mortgage insurance premiums.
The VA loans on the other hand, are the type of loans available to veterans. This usually gives the veterans the ability to buy a home even with no down payment, and they are also offered a wide selection of products that will better fit their needs.
