Conventional mortgages are loans that are not guaranteed or insured by any government agency, such as the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA). VA loans are designed for Veterans, active duty military personnel, and, in some cases, their spouses and can have a lower down payment. As a part of the Department of Housing and Urban Development, the FHA insures residential mortgage loans made by private lenders, like First Choice Loan Services Inc.
Conventional mortgages loans adhere to Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac) guidelines and can be conforming or non-conforming. Fannie Mae is a corporation created by the federal government that buys and sells conventional mortgages. It sets the maximum loan amount and requirements for borrowers. Chartered by Congress in 1970, Freddie Mac was established to strengthen and support the country’s residential mortgage market and provide more opportunities for homeownership.
Typically, conventional mortgages have fixed terms and rates. The most common is a 30-year fixed-rate loan. With this type of conventional mortgage, the interest rate is fixed for the 30 year term of the loan. Another common feature of a conventional mortgage is a 20 percent down payment. In a real life example, if a home buyer is purchasing a home for $300,000, the loan provided by the mortgage lender will be for $240,000, or 80 percent, of the purchase amount. The remaining $60,000 will need to be paid by the borrower at closing.
These types of loans provide wonderful home financing options for borrowers with reserves for a 20 percent down payment. Because of this larger percentage down, conventional mortgages can provide better interest rates than non-conventional mortgages. However, home buyers still have mortgage options even if they may not have access to the typical 20 percent down payment. With a lower down payment amount and a potentially higher interest rate, non-conventional mortgages such as an FHA or VA loan might be a better option.
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