All About Conventional Loans


Quick Answer

A conventional loan is a loan given out for the purposes of purchasing a home. Conventional loans have fixed terms and rates. They are distributed and managed by private third parties instead of government agencies.

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Full Answer

Conventional loans are a type of mortgage. Loans can either be classified as government loans or conventional loans. In the case of government loans, certain government agencies, including the Department of Veterans Affairs, the Federal Housing Administration and the United States Department of Agriculture, insure loans for qualifying individuals. These loans are still regulated by third-party insurers, however.

In the case of government loans, insurance is paid for by fees collected from the people who take out the mortgages. Conventional loans are all other types of loans that have no involvement from a government agency. Conventional loans fall into several categories including jumbo loans, sub-prime mortgages and portfolio loans. Conventional loans can also be categorized as either conforming or non-conforming.

Types of Conventional Loans
Loans that conform are regulated by the government. In the case of conventional loans, government-sponsored enterprises Fannie Mae and Freddie Mac establish parameters regulating the terms and conditions of conforming loans, notes NFM Lending. In this case, governmental agencies are not the direct issuer of the loan (which distinguishes these types of loans from governmental loans, where the governing agency has a direct role in the loan transaction). Instead, they buy mortgages from lenders and sell them to loan recipients.

The benefit for the loan recipients is they receive a loan at a lower rate than they might otherwise if purchasing it through a private third-party lender. However, conforming loans come with requirements for repayment. People who take out loans are responsible for making regular payments (usually on a monthly basis) for conforming loans. Conforming loans still carry an interest payment in addition to the principal. Those who fail to make payments in full or who can't keep up with required monthly payment run the risk of defaulting on the loan. All types of conforming loans, regardless of what agency they're authorized by, are classified as conventional loans, according to Lendingtree.com.

Non-conventional loans, in contrast, are loans that are not regulated by the government. Instead, third-party lenders such as banks and credit unions sell mortgages to those looking to get a loan. These lending schemes also establish terms and conditions for loan holders to repay the loan in a certain period of time. The advantage for loan holders in non-conforming loans is they can usually take out a larger loan (a jumbo loan) than they can with a government-regulated loan, as claimed by Lendingtree.com. However, they may also face higher interest fees with a third-party lender.

Another type of loan is the portfolio loan. Portfolio loans give loan holders the flexibility of setting their own schedule for repayment rather than having a government agency set the schedule. This gives them more financial flexibility, but these types of loans still impose penalties for the loan holder's failure to repay them on time. Another advantage of portfolio loans is that they give loan seekers the opportunity to use stocks and bonds to finance their loans, which are typically not allowed for financing other types of conventional loans.

Loan Structures
Conventional loans can either have fixed rates or variable rates. Loans with fixed rates require a down payment of three percent, while variable-rate loans require a down payment of at least 10 percent, according NFM Lending.

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