Understanding the Pros and Cons of Conventional Loans
Buying a home is one of the most incredible experiences; it is the time in your life when you claim ownership and select the location you want to spend the next 15 to 30 years. Perhaps you’re married and thinking about having kids. Despite the excitement around the homebuying decision, there are a few things you need to consider, primarily the mortgage loan type. Most people consider a conventional mortgage, but is that the right option for you? To decide if it is the best option for you and your family, consider the pros and cons of conventional loans.
Understanding a Conventional Loan
Before diving into the pros and cons, let’s define conventional loans. On the surface, these loans are commonplace with many applications. Unlike other mortgage options, however, a traditional loan is not through a government agency. This means that conventional loans are riskier to the lender, making them more challenging to apply for successfully.
While not technically backed or secured by any government institution, conventional loans for mortgages can follow guidelines that Fannie Mae or Freddie Mac guarantees. Loans following these guidelines are called conforming and typically have less strict requirements than non-conforming options.
Understanding How a Conventional Lender Views Applications
Conforming and government-backed mortgages are often considered less risky because the lender’s financial stake in the mortgage can be insured, meaning it reduces its risks. Unfortunately, the same cannot be said of non-conforming conventional loans.
Because of the increased risks to the lender, it’s not uncommon for credit score minimums to be established and hefty down payments required. In most cases, an individual will need a minimum credit score of 620, and they will need at least a 20% down payment. However, if you want to qualify for the best interest rates, you should aim for a score of 760 or better.
Pros and Cons of Conventional Loans
If you are considering a conventional mortgage, understand the journey might be a bit more challenging, but it is still possible. Before you make your final decision, consider the following pros and cons.
Pros
One of the main reasons people pursue a conventional mortgage is the lower interest rate. However, remember that the best rates are often reserved for the most qualified candidates. If you have a high credit score, a conventional loan could be an excellent option.
Conventional loans also offer higher loan limits, allowing for larger home purchases. Many conventional programs also offer fixed rates with term length options. So while non-conforming conventional programs are stricter with approvals, the programs provide more flexibility and variety than government-backed and conforming mortgages.
Cons
Unfortunately, not everyone can or will qualify for a conventional loan. With the greater risk to the lender, the guidelines are more rigorous, and the interrogation of your financial history more in-depth. Non-conforming conventional loans are often best for those with high credit scores and impeccable credit histories.
Are you looking for home financing and need some help navigating the mortgage waters? United Wholesale Financing can help. Contact a UWF representative to discuss your needs and get your personalized quote today!
Sources:
https://www.thebalance.com/advantages-and-disadvantages-conventional-vs-fha-loans-4164707
https://smallbusiness.chron.com/small-business-loan-qualifications-3610.html
https://www.cnbc.com/select/credit-score-needed-to-buy-house/