Two HousesIf you’re currently in the process of purchasing a home, you may have come across the terms “conventional” and “non-conventional.” But what’s the difference? And why should you choose one over the other?

Conventional Loans

A conventional loan is any type of mortgage that is not secured by a government-sponsored entity (GSE), such as the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).

These loans are also known as “conforming loans” because they meet guidelines or “conform” to the rules set forth by Fannie Mae and Freddie Mac, the two largest investors of conventional loans. The rules they conform to include a minimum FICO requirement of 620, a loan amount not exceeding $417,000 for a single-family home, and a debt-to-income (DTI) ratio not exceeding 36%.

DTI represents the amount of your monthly mortgage payments and other debts in comparison to your monthly gross income. Total debts usually can’t exceed 36% of your monthly gross income. In certain circumstances, you can have a DTI as high as 45%, but only if you meet Fannie and Freddie’s requirements, including exceptional credit history.

Additionally, conventional loans require a down payment of at least 20%. So if your loan amounts to $100,000, you would need to put down $20,000 plus any fees and closing costs upfront. If you’re not able to put down 20%, you’re required to buy private mortgage insurance (PMI).

There are two basic types of conventional loans:

  • Fixed rate: Your mortgage rate never changes over the life of your loan.
  • Adjustable rate: After an initial fixed-rate period, your interest rate can adjust up or down, depending on the market. This option can save you money if you plan to move or refinance within 5–10 years.

In the past, prospective homeowners were required to put down at least 5% for conventional loans, but a recent program now allows down payments as low as a 3%. With attractive interest rates and the option for a low down payment, a conventional loan is a great option for some buyers.

Non-Conventional Loans

The other type of loan is called a non-conventional, or “government” loan. These loans are backed by the government, offering different and sometimes more flexible products for certain buyers. Depending on your financial situation, non-conventional loans can help you obtain a mortgage when you otherwise may not have met conventional guidelines.

There are two types of non-conventional loans:

  • FHA: An FHA loan has less stringent qualifications and credit requirements than a conventional loan. You can put less than 20% down when purchasing. FHA loans, however, do require you to pay mortgage insurance premiums (MIP).
  • VA: VA loans allow veterans to purchase a house with zero money down and offer a wide variety of products to fit your needs.

Whether you choose a loan product that is conventional or non-conventional, you should always discuss your options with your Home Loan Expert. Your individual situation will determine which loan option fits you best. Explore the different types of loans with the mortgage comparison tool.

To learn more about the mortgage process, check out the Zing Blog’s new educational video series on YouTube:

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This Post Has 6 Comments

    1. Hi Christina:

      You can get an FHA loan within three years of your short sale date. There are a few conditions.

      You can’t be 30 days late on mortgage or installment payments in the year prior to the short sale. You also can’t 30 days late on mortgage installment payments in the year prior to your application.

      If you can’t qualify for an FHA loan at this point, there’s one other option we can look into for you. I recommend speaking with one of our Home Loan Experts at (888) 980-6716. Hope this helps!

  1. I am considering purchasing a foreclosed home at auction. The auction site specifies that no conventional financing is available for this house. Does that mean that the successful buyer needs to come up with the entire amount of the sale price?

    1. Hi Wendy:

      It depends on what they mean by conventional. Conventional loans are insured by Fannie Mae or Freddie Mac in the mortgage space. However, I would ask them to clarify because you may be able to get government-backed financing through the FHA, VA or possibly USDA, depending on your eligibility. If they really mean no financing, then it does mean they’re only looking for cash buyers. I would contact them and ask the question.

      Thanks,
      Kevin

  2. Hi,
    I hear that many large banks such as Bank of America are offering non-agency, non-QM down payment loans – is that true?
    Thank you in advance for your response!
    Kind regards,
    Amilda

    1. Hi Amilda:

      I can’t speak for other banks. That being said, if you’re looking for a nonagency non-qualified mortgage loan, we may have one mortgage option for you. I’m going to recommend you speak to one of our Home Loan Experts by calling (888) 980-6716.

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