The Art Of Haggling And Other Money Secrets

Conventional Loans Versus Non-Conventional Loans

Home ownership—it's the quintessential American Dream. With the ever-rising cost of living, some people worry they are just chasing an elusive dream when they look at their weekly paycheck. Fortunately, many mortgage lenders are willing to think outside the box of conventional home loans. Here's a look at the differences between conventional and non-conventional home mortgages.

What Is A Conventional Loan?

Any home mortgage loan that isn't secured by a government entity such as the U.S. Department of Veteran Affairs or the Federal Housing Administration is a conventional loan. This doesn't mean they don't have government oversight, however. Sometimes called "conforming loans," these loans must conform to certain standards put forth by Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association.) These government entities purchase mortgage loans from commercial lenders, enabling them to free up funds to offer more loans to prospective home buyers. In theory, this keeps the housing market strong.

In order to qualify for a conventional loan, the loan must conform to certain standards:

  • Your credit score must be 620 or above, but many times the lender expects a much higher score
  • Your debt-to-income ratio must not exceed 36 percent
  • Your loan amount for a single-family home cannot exceed $453,100 in most areas of the US
  • Maximum conforming loan limits may be higher in more expensive housing markets

A down payment of 20 percent is also a hallmark of a conventional loan; however, Fannie Mae now offers a program for first-time home buyers where the down payment can be as low as 3 percent. Of course, a lower down payment can also affect your debt-to-income ratio.

What Is A Non-Conventional Mortgage?

A non-conventional loan is a loan that is secured by the federal government.  These mortgages can be more flexible in their lending requirements—for example, your credit rating might not have to be as high.

There are two different government-sponsored mortgage loans. One is from the Federal Housing Administration (FHA). The other is underwritten by the Veterans Association (VA).

With an FHA loan, your credit score can be as low as 580 to qualify. A down payment of only 3.5 percent is required in many cases. If your score is lower than 580, you may still qualify for a loan, but it will require a 10 percent down payment. FHA loans do require mortgage insurance premiums, which can easily amount to $100 or more a month on top of your mortgage and other housing expenses.

If you are a qualified veteran, service member, or spouse, a VA loan is your best bet. While the VA doesn't have a credit score minimum, most lenders do, typically 620, although it may go as low as 580. Many times, no down payment is required. VA loans also generally offer lower interest rates, saving you considerably over the life of the loan.

If you are interested in buying a home, schedule an appointment with a mortgage lender. They can help you figure out which type of home loans are available to you.