Conventional loans are considered a number one choice for large loan applicants as they are quite flexible and offer more perks as compared to other types of loan. They are also commonly referred to as conforming loans, mostly because they stick to the standards set by Fannie Mae and Freddie Mac.
Conventional mortgage is a specific type of a loan when no more than 80% of the appraised value or the market price of the property is provided on the part of a lender. The sum of money allotted as the 80% of the price of the property is also known as lending value. The borrower should provide the other 20% of the price in cash. This, in its turn, is called down payment. Still, down payment is set by the bank and may range from 5% to 20%. A generally accepted advice is to pay not less than 20%, as in that case a bank will require the borrower to purchase private mortgage insurance, which aims to protect lenders against the loss.
At the beginning it may seem nice to pay a private mortgage insurance instead of down payment. However, there is a sound reason to stick to the 20% traditional mortgage. Private mortgage insurance may turn to be quite pricey, as the sum ranges from 0,5% to 1% of the total sum.
Conventional mortgages are divided into two types: conforming and non-conforming.
They have a set maximum sum to be allocated. The accepted average may differ from area to area. Non-convectional loans are provided for amounts higher than the set maximum. They are commonly known as jumbo loans. Typically, lenders charge higher rates interest rates for jumbo loans, as they are much riskier in their nature.
Conventional loans are the choice of 60% of loan applicants. The main benefit of the conventional mortgage is the buyer’s immediate equity as a certain sum of the property has already been paid. This way a bank decreases possible risks, and makes sure the buyer already has a fair share. Moreover, many financial analysts claim that conventional mortgage has undeniably more pros when it comes to the closing costs. It is essential to keep this point in mind, as many shady lenders attempt to add some hefty fees. Sometimes they even require some unbelievable money, hence, it is good to be aware of the existing requirements. This type of loan is easy to prepare, has fewer requirements, therefore, is less costly at the closing.
Which one is best
Conventional mortgage best works for buyers with good credit and larger savings. Such type of loan is appropriate for making large investments, such as buying a primary residence, rental property or second home.