What is a Conventional Loan?
Real Estate Terms and Definitions:
Quick Definition: Any loan not insured or guaranteed by a government agency. (Refers to loans made by institutional lenders.)
In-Depth Explanation of Conventional Loan
There are a lot of ways to explain a conventional loan, but the easiest way is to say what a conventional loan is not. It is not a government insured loan like a VA or an FHA loan. Mortgages/loans made by lenders that are not guaranteed or insured by a government agency like the VA or FHA are called conventional loans to signify that fact. They're just "regular" loans.
FHA and VA loans are very popular because they have low down payment options. VA loans (used by current and former military members and those with employment connections to the defense department) have "no money down" options which are often referred to as 100 percent financing. FHA loans are often financed with 3.5 percent down payments. The government agencies that insure them have special mortgage insurance options that sometimes are paid by the borrowers upfront to safeguard the agency against losses from default.
Conventional loans are sometimes confused with conforming loans. Conforming is a different subject. Conforming loans are those that fit within federal guidelines that allow for them to be resold to agencies like Fannie Mae and Freddie Mac. A loan must "conform" to the standards that make it fit within the safety guidelines that FNMA and FHLMC set up to safeguard their investments. We often refer to conforming loan limits, which cap the total size of the mortgages. These loan limits are often different based on geography. A conforming loan might be capped at $400,000 in one city, but be able to go as high as $600,000 in a high cost city and still be conforming.
How Conventional Loan could affect your real estate transaction:
The seller of a home will often want to know about the buyer's financing. In a purchase contract, you may have a financing addendum that will detail the kind of mortgage you're getting as a buyer. The addendum may require you to tell the seller if you're getting a conventional, VA, FHA, or other kind of mortgage. I will also often ask you how much of a down payment you're making.
Sellers will take this information into account when deciding whether or not to accept an offer. There is no right or wrong loan type, and any particular home seller may look at them differently. It's just more information for the sellers to analyze.
Conventional loans, in some cases, may have less stringent appraisal processes. Every situation is different, but in many cases we see appraisers for FHA and VA do thorough inspections of homes and call for repairs to be done by the homeowners before closing. In our experience, that's much less likely to happen with an appraiser for a conventional loan.
Want to know more about conventional loan?
This post is for informational purposes only and is not legal advice. Buyers and sellers of real estate should not rely upon it to make decisions. Consult with a licensed real estate broker and/or real estate attorney before making real estate related decisions.
We have real estate brokers, mortgage lenders, inspectors, title officers, and others who can answer your real estate-related questions. Give us a call or send us an email and we can put you in touch with someone who can answer your conventional loan questions or any other questions about home buying, selling, and the real estate world.
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Sam DeBord is Managing Broker with Seattle Homes Group and Coldwell Banker Danforth. Our team serves home buyers and sellers in Seattle, on the Eastside, and across the Puget Sound Region.
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