What is Conventional financing?
Posted July 10, 2023Conventional financing refers to a type of mortgage or loan that is not insured or guaranteed by a government agency. It is often contrasted with government-backed loans, such as those offered by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA).
In conventional financing, the lender assumes the risk of providing the loan without any government backing. This means that if the borrower defaults on the loan, the lender may suffer a financial loss. As a result, conventional loans typically have stricter requirements and higher down payment amounts compared to government-backed loans.
- Lender's Risk: Since there is no government insurance, the lender bears the risk if the borrower defaults on the loan.
- Loan-to-Value Ratio (LTV): Conventional loans often require a lower loan-to-value ratio, meaning borrowers may need to make a larger down payment, typically around 20% of the home's purchase price. However, some lenders may offer conventional loans with lower down payment options, such as 5% or 10%, but these often require private mortgage insurance (PMI).
- Credit Requirements: Conventional loans generally have stricter credit score requirements compared to government-backed loans. Lenders may consider factors such as credit history, debt-to-income ratio, employment stability, and other financial factors when evaluating a borrower's creditworthiness.
- Flexibility: Conventional loans offer flexibility in terms of loan duration and repayment terms. Borrowers can choose fixed-rate or adjustable-rate mortgages and may have more options for loan terms.
- Loan Limits: Conventional loans have maximum loan limits set by regulatory authorities, which may vary depending on the location. These limits ensure that lenders do not provide excessively large loans that could increase the risk for both parties involved.
Here are a few key features of conventional financing:
Conventional financing is commonly used for home purchases, refinancing existing mortgages, or other personal or business purposes. It is important to note that the specific terms and requirements of conventional loans can vary between lenders, so it's advisable to consult with multiple lenders to compare rates, terms, and conditions before making a decision.