There are various categories of mortgage loan offers. Three main categories are the mortgage loans guaranteed by the Federal Housing Administration (FHA), loans insured by the Department of Veterans Affairs and of course the conventional loans. Here it is to be noted that the majority of the loans are of conventional types. If you are a prospective home buyer, you should be well aware of the different types of loans available at the market place. Here we try to discuss about the different aspects of a conventional loan.
Conventional loans are the most common type of loan. These loans are issued by the private entities such as the private lenders, thrift institutions, credit unions and banks. Mortgage loans which are issued and governed by the Freddie Mac and Fannie Mae, also come under the category of conventional loans. Loans guaranteed by the Department of Veterans Affairs and the Federal Housing Administration come under the category of non-conventional loans.
Types of conventional loans
There are two major types of a conventional loan – conforming loan and a non-conforming loan.
1. Conforming loan
If you take out a conventional loan which is $417,000 or less for a single-family home, then it comes under the category of conforming loan. The numerical figure is the conforming loan limit. Here it is to be noted that this conforming loan limit is not fixed throughout the country. In some high-cost areas, this conforming loan limit is much higher. One such high cost area is San Francisco.
2. Non-conforming loans
If you take out a conventional loan in a certain area which is more than the conforming loan limit for that area, then it comes under the category of a non-conforming loan. The non-conforming mortgage loans are also known as the jumbo loans. Generally, the rate of interest on a non-conforming loan is much higher than the rate of interest on a conforming loan.
The rate and term of a conventional loan
Rate and term wise, there are different types of conventional loans. Rate-wise, there are two types of conventional loans – fixed rate and adjustable rate. Term-wise, the two most common types are the 15-year and 30-year conventional loans. In case of a fixed rate conventional loan, the rate of interest on the loan remains fixed throughout the entire term of the loan. On the other hand, in case of an adjustable rate conventional loan, the rate of interest on the loan varies with some standard index. However, for a stipulated initial period of time, the rate remains fixed. Again, the rate on a 15-year conventional loan is usually lower than the rate on a 30-year conventional loan.
One important factor that the lenders take very seriously while offering you a conventional loan is your credit score. Credit score, a three digit number, tells about your creditworthiness. If you have credit blemishes such as late payments, non payments etc. that show up on your credit report. Usually lenders demand a credit score of 750 or more so as to offer you a conventional mortgage loan at better terms.