We’re all familiar with conventional loans—these are the loan packages that require down payments, good credit ratings, and a steady income. That’s what makes them “conventional.” But have you ever been in a situation where conventional loans didn’t meet your needs? Non-conventional loans—also known as alternative loans—may be the answer. Here, we will explore the difference between these two loans:

Conventional Loan

A conventional loan is a type of loan with fixed interest rates, principal and interest payments, and no prepayment penalties. A conventional loan is most likely offered by a local bank or credit union. These types of loans require less paperwork, less scrutiny, and a shorter application process.

Because conventional loans are offered through many different financial institutions, there are several different types of conventional loans. This includes traditional fixed-rate loans and adjustable rate loans.

  • Fixed vs. Adjustable Rate Mortgage

A fixed-rate loan means the loan’s interest rate does not change over time. If you have a fixed rate loan with a 10-year term, you will pay the same amount every month. As interest accrues over time, your principal balance will decrease. The principal is the amount you originally borrowed, and the interest is the amount that accrues over the life of the loan.

An adjustable rate loan changes in accordance with an external index, such as the prime rate or some other index or benchmark. The interest rate may go up or down—or stay the same, depending on what the index is doing. In addition to the interest rate, your loan payments may also change. So if the prime rate changes, your loan payment may increase.

Unconventional Loan

The non-conventional mortgage is designed to help individuals with low to moderate incomes or individuals that make a low or no down payment. Some of the examples of conventional loans are the following: 

  • Conforming Loan

This is a loan that meets the standards and guidelines of the Federal National Mortgage Association (Fannie Mae) or the Federal Home Mortgage Corporation (Freddie Mac).

  • Non-Conforming Loan

Non-conforming loans are mortgages that exceed the Federal Housing Finance Agency’s (FHFA) conventional mortgage loan limits and have higher interest rates and down payments.

Examples of Non-Conventional Loans

There are many different types of non-conventional loans. Some of these loan types include:

  • FHA Loans: These loans are insured by the Federal Housing Administration and are available to low- to moderate-income first-time homebuyers.
  • VA Loans: VA loans are backed by the United States Department of Veterans Affairs.
  • USDA Loans: USDA Loans are issued by the United States Department of Agriculture.
  • HUD Section 184: A low-down-payment mortgage program approved by the Housing and Urban Development Office of Native American Programs that guarantees the loan for Native Americans, making homeownership more affordable.

Make the Right Choice

When you’re looking to purchase a home, you may have the option to use a conventional loan or a non-conventional loan. Each loan has its own disadvantages and advantages. You should be sure to review both before you make your final decision.

Looking for home loans in Oklahoma and Florida? Cross Timbers Mortgage helps customers find the right mortgage for their specific goals. Get in touch with us!