A conventional loan is not guaranteed or insured by the federal government. Local lenders (like banks, savings and loans, and credit unions) made the first traditional mortgage loans. The lenders held the loans in their investment folio until the borrower paid the loans in full or the loans were foreclosed. This practice allowed for a lender-borrower relationship. However, conventional loans provided more risks for the lenders. For instance, when rates rose, lenders received low interest on their loans, and they were unable to recycle the funds to lend to other borrowers.

Conventional loans have advantages and disadvantages.

Conventional Loans Advantages:

• The lender may be more willing to negotiate or eliminate certain loan fees.
• The lender may allow collateral other than or in addition to the real property being mortgaged.
• The lender may be willing to finance personal property with the real estate loan (such as appliances and furniture).
• The lender may self-insure the loan if the borrower encounters difficulty in obtaining private mortgage insurance. This increases the interest rate of the loan to compensate for its greater risk.
• The lender may be willing to fund a portion of the closing costs in exchange for a higher loan interest rate for the borrower who doesn't have enough cash.
• The lender may allow some creative financing options for the buyer if the loan is to be held in portfolio.

Conventional Loans Disadvantages:

• Conventional loans generally require larger down payments than federally insured loans.
• The lender set the interest rates and may exceed those of FHA and VA loans.
• The lender determines the origination fees and other costs and may be higher than other loan programs.
• The borrower may be required to purchase private mortgage insurance for loans with greater than an 80 percent LTV ratio.
• Some lenders may require that the borrower pay nonrefundable application or processing fees at the time of loan application.
• The lender may not allow some creative financing options for the buyer.

If you’d like to know if this loan is right for you, please contact us. We’d be happy to help.