When you first started thinking about buying a home, you probably imagined the freshly painted rooms and the charming backyard. One thing you probably didn’t imagine is the hours you’d spend talking to your lender and researching different mortgage options. But how do conventional loans differ? And why are they the only option that seems to be recommended to you?
What is a conventional loan?
A conventional loan is any mortgage that does not conform to specific guidelines set by the Federal Housing Finance Agency (FHFA). These guidelines apply to government-backed mortgages like VA, FHA, and USDA loans but not to conventional loans. Conventional mortgages are backed by bond investors instead of the government, which means they’re slightly riskier than their government-backed counterparts—but still manageable for most homeowners.
The Difference Between Conventional and Government-Backed Loans
The main difference between conventional and government-backed loans is that conventional loans are sold to banks by private investors, while government-backed loans are sold to banks by the government. Private investors, or bond investors, are people or organizations that purchase bonds in order to make money off of them—but they can also invest in loans. If all goes well, the investor will make the borrowed amount, plus interest, back in the sale of the loan.
The government plays an important role in the mortgage market. They ensure that mortgage loans are fair for all parties involved. They also have certain criteria that home loans must meet in order to be eligible to be bought by the government. These are known as government-backed loans.
Types of Conventional Loans
1 – Conforming Conventional Loans
The vast majority of conventional loans fall under this category. These are not federally insured or guaranteed loans, but they are mortgages that conform to the FHFA’s standards for “conventional” mortgages. These loans are often referred to as “conforming” loans because they conform to these standards.
2 – Non-Conforming Conventional Loans
A non-conforming loan is any loan that is not eligible for Fannie Mae or Freddie Mac. These are the riskiest types of loans you can get because if the loan goes into foreclosure, you will likely lose your house since it’s not backed by the government.
Getting a Conventional Loan You Can Afford
Getting a conventional loan is easy. The only tricky part is figuring out how much you can afford to borrow. To figure this out, the lender will consider the value of your home, your credit score, your down payment, your debts, and your income. You can estimate your monthly mortgage payment with an online mortgage calculator.
Another thing to consider is the term of your loan. The term of the loan refers to the number of years it will take for you to pay off the loan. Mortgages can be 15, 20, or 30 years, but the only real difference is the amount of interest you will pay overall. The shorter your term, the less interest you’ll pay overall—but the sooner you’ll pay off the loan.
To ensure that you get the mortgage that is right for you, it is crucial that you work with a skilled broker. The right broker will want to make sure you understand all of your options and will recommend a loan that’s appropriate for your unique financial situation.
If you’re ready to buy a home, Cross Timbers Mortgage can help. Speaking to one of your real estate professionals is a great place to start. Let us help you purchase a new home today!