Conventional Loans

A conventional loan is any mortgage which is not guaranteed or insured by the federal government.

Advantages of Conventional Loans

• Lenders may be willing to keep the loan in their own lending portfolio, allowing more underwriting flexibility.
• Lenders may be more willing to negotiate or eliminate certain loan fees.
• A lender may be willing to finance personal property with the real estate loan, such as appliances and furniture.
• If a borrower has difficulty obtaining Private Mortgage Insurance (PMI), the lender may self-insure the loan, increasing the interest rate of the loan to compensate for its greater risk.
• For the cash-short borrower, the lender may be willing to fund a portion of the closing costs in exchange for a higher loan interest rate.
• If the loan is to be held in portfolio, the lender may allow some creative financing options for the buyer.

Disadvantages of Conventional Loans

• Conventional loans generally require larger down payments than government-backed loans. Typically, the minimum down payment is 5% of the Sales Price.
• Interest rates are set by each lender and may exceed those of FHA and VA loans.
• Origination fees and other costs are also determined by individual lenders and may therefore be higher than those of other programs.
• Because mortgage documents for conventional loans can vary by state and even by lender, the lender could specify that certain clauses be included in a mortgage contract; for example, alienation (due-on-sale), prepayment penalty, or acceleration clauses.
• Loans with greater than an 80 percent loan-to-value (LTV) ratio will require the borrower to purchase Private Mortgage Insurance.
• Some lenders may require that the borrower pay nonrefundable application or processing fees at the time of loan application.

Affiliates on the REAL FINANCE SOLUTIONS approved list do not charge fees upfront for loan application or pre-approval.

The rules regarding what a lender can and can't do in conventional mortgage lending is determined by the loan's ultimate destination. A lender who wants to sell loans to the secondary market has one set of rules that must be adhered to. If the borrowers require PMI, another set of rules have to be applied. Because a majority of all conventional loans are sold to the secondary market, those guidelines have become the general standard for conventional mortgages.

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