As an expert on this field, I always advise the new buyers to meet with their mortgage broker or lender early to decide on the type of loan to get as the mortgage specialist carries a broad range of products including the dull, old and tired home loan known as a conventional loan. A bank also can make a conventional mortgage loan, but in general, the product line of the bank is limited and only particular to that bank. On the other hand, the mortgage brokers can broker home mortgage loans through any bank.
After the meltdown of mortgage in the year 2007, a lot of the exotic types of loans have vanished, and this old and boring conventional loan regained its market and also a permanent position in the real estate business.
The reputation of a conventional loan is always as the safest type of mortgage loan, and there is a variety of conventional loans which you can choose as per your convenience. However, the difference between any other kind of mortgage and a conventional loan is that the conventional loan is not extended, insured nor guaranteed by any government entity. We refer this as a non-GSE loan. Non-GSE stands for a non-government sponsored entity. There are various types of loans offered by the government like the FHA, VA and USDA loans. The government insures the FHA loan and the VA loan is backed by the federal government, specifically for military personnel, while the USDA is extended to those who wish to buy a property located in a rural area. The requirement of down payment is different as well. The minimum down payment for FHA loans is 3.5 percent, and for VA and USDA loans, it is zero, respectively.
Amortized conventional loans
A homebuyer can take an amortized loan from a bank, a credit union, a mortgage broker or a lender. The two essential factors of this loan are the loan to value ratio and the term of the loan.
- The 97% LTV with a term of 15, 20, 25, or 30 years;
- The 95% LTV with a term of 15, 20, 25, or 30 years;
- The 90% LTV with a term of 15, 20, 25, or 30 years;
- The 85% LTV with a term of 15, 20, 25, or 30 years;
- The 80% LTV with a term of 15, 20, 25, or 30 years.
The LTV can be lower than 80 percent as well.
In conventional loans, if a borrower takes out a mortgage loan with a loan-to-value greater than 80%, the borrower is required to carry a Private Mortgage Insurance, commonly referred to as PMI. The term of this loan can either be shorter or longer depending on the qualifications of the borrower. Suppose, if a borrower qualifies for a home loan of 30 years as compared to a 15-year term, the payment of a 30-year mortgage would be much lower. On the other hand, a 15-year mortgage will have a higher monthly payment.
Adjustable Rate Mortgage loans
That adjustable rate mortgage loan signifies the loan is flexible and can fluctuate. The mortgage is fixed initially for a specific period. After this, it adjusts depending on the market condition. There are three prevalent adjustable loan types:
- The 3/1 ARM. The loan is fixed for three years then it is going to adjust for the next 27 years.
- The 5/1 ARM. The mortgage loan is set for five years, and then it is going to change for the next 25 years.
- The 7/1 ARM. The loan is fixed for seven years; then later it is going to adjust for the next 23 years.
Most borrowers these days go for the traditional fixed rate mortgage and stay away from adjustable rate mortgages. The adjustable-rate mortgage can help borrowers who do not intend to stay in the house for an extended period.
Choosing whether to get a conventional loan vs. an FHA loan is a matter of personal preference, depending upon the borrower’s circumstances. Most first-time home buyers prefer an FHA loan over the other types of loans available in the market for a reason. The rate of any government insured, guaranteed, or subsidized loan is lower than a conventional loan. The advantages that FHA or VA loans are offering are more alluring than the conventional mortgages in the eye of a borrower.