Conventional Loans
A conventional loan is a type of mortgage that is not insured or guaranteed by a government agency. Unlike government-backed loans such as FHA (Federal Housing Administration), VA (Department of Veterans Affairs), or USDA (United States Department of Agriculture) loans, conventional loans are backed by private lenders and typically follow guidelines set by two government-sponsored entities: Fannie Mae and Freddie Mac.
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Key features of Conventional Loans:
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No Government Guarantee: Conventional loans do not have the backing of a government agency. If the borrower defaults, the lender bears the risk.
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Credit and Down Payment Requirements: Conventional loans often have stricter credit score and down payment requirements compared to some government-backed loans. Typically, a higher credit score and a larger down payment are needed for favorable terms.
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Loan Limits: Conventional loans have loan limits set by Fannie Mae and Freddie Mac. These limits vary by location and are adjusted annually.
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Fixed or Adjustable Rates: Conventional loans can have either fixed interest rates, which remain constant throughout the loan term, or adjustable rates, which may change based on market conditions.
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Private Mortgage Insurance (PMI): If the down payment is less than 20%, lenders often require the borrower to pay for private mortgage insurance to protect the lender in case of default.
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Versatility: Conventional loans can be used for various purposes, including purchasing a home, refinancing an existing mortgage, or obtaining cash-out for home improvements.
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​It's important to note that within the category of conventional loans, there are also conforming and non-conforming loans. Conforming loans meet the criteria set by Fannie Mae and Freddie Mac, while non-conforming loans, such as jumbo loans, exceed these limits. Borrowers should carefully consider their financial situation and explore different loan options to determine the most suitable mortgage product for their needs.
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Melanie Taliaferro