Breakdown of Conventional and Non-Conventional Loans

Conventional loans

Conventional loans are any mortgage loans that are not guaranteed or insured by the federal government but are considered mortgages that follow the guidelines of government-sponsored companies (GSEs) such as Fannie Mae or Freddie Mac. Then conventional loans are divided into compatible or non-compliant loans.

Compliant loans are subject to the terms and conditions set forth by Fannie Mae and Freddie Mac.

Non-compliant loans do not meet the requirements of Fannie Mae or Freddie Mac but are still considered conventional money mutual loans.

Conventional lending is usually recommended if an investor is unsure of their credit score or is financially unstable to pay a large down payment. This loan is ideal for investors who require flexible repayment options or want lower closing costs.

Standard Home Requirements – Homebuyers must invest a minimum of 5%-20% of the sale price in cash for the down payment and closing costs. For example, if the sale price is $100,000, the homebuyer must invest at least $5,000-$20,000.

Eligibility – This loan can be used to finance first and second homes and investment properties, along with funds to purchase secured condominiums, planned unit developments, modular homes, one- to four-family homes, and turnkey homes.

Conventional programs offer the following loans –

Fixed Rate Loans – For the most part, conventional mortgages are fixed-rate mortgages, and your interest rate usually stays the same for the entire life of the loan. Of course, with a traditional fixed-rate mortgage, you’ll always know the exact amount of your monthly payment and how many payments are left.

Adjustable Rate Loans – The initial interest rates and monthly payments on an adjustable-rate mortgage (ARM) are relatively low, but they can change over the life of that loan.

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Non-traditional loans

Non-traditional loans are the exact opposite of conventional loans as many surprises can appear, not to mention the adjustable-rate mortgage (ARM) in this type of loan. Non-traditional loan surprises are especially targeted at those who are low on mortgage loans. If you are considered one of those homeowners who are overwhelmed with your mortgage, find out if you are required to do the following:

• The change in future interest rates
• Loans with interest and principal amount do not decrease
• A large payment due at the end of the loan
• The creditor has the power to change the amount you pay if certain situations occur.

An adjustable rate mortgage (ARM) starts at a rate that can start low and can go down or up depending on several factors. It is not known how much you will pay in the future on this loan. Two other common types of non-traditional loans are interest-only loans and balloon repayment loans (a large payment at the end of the loan term).

Non-Traditional Loan Requirements – According to Mortgage311, government-backed non-traditional mortgage loans often come with low or even no down payments, as well as lower credit score requirements. For example, the down payment requirement for FHA-backed mortgages can be as low as 3.5 percent. However, qualifying credit scores for non-traditional mortgages can be as low as 540, although lenders generally ask for 640. Depending on the non-traditional mortgage loan product, interest rates can be higher than those for a conventional mortgage.

Eligibility – Applicants for this loan will need to meet requirements as not every federally insured or secured loan product is open to all homebuyers. For example, VA loans are only eligible for veterans or family members. Mortgage loan products offered by the USDA are usually available to low-income, rural homebuyers. The federal government’s unconventional FHA loan product is open to nearly all first-time homebuyers.

Whatever loan you choose or have to apply for, be sure to do your research and understand the benefits, consequences, and requirements before you become a home buyer. This breakdown of conventional and non-traditional loans should help prepare you for “surprises” before unexpected interest rates rise or large payments come due at the end of your home loan. 

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