One of the most popular of all home loan types available is called a conventional home loan. Is this type of loan right for you, your financial situation and your family? If you are looking for a home loan it would be wise to understand the advantages and disadvantages associated with this type of loan before you commit yourself to such a large financial commitment. This article will address some of those important questions.
The first thing that you should ask yourself about a conventional home loan is whether or not you are going to be able to repay it in a timely manner. You should take into account how much you make each month and how long your monthly bills take you. Many people choose to use a conventional loan because they offer lower interest rates than other types of loans. However, if you can’t afford to pay off your loan in a timely manner there may be some drawbacks to choosing this loan option. These could include:
-Lack of flexibility. Most conventional home loans require the borrower to qualify for them. If you have bad credit or no credit history, there is no option to apply for a conventional loan without qualifying. It is possible to obtain financing on these types of mortgages even with a poor credit history, but you may need to pay higher fees and/or interest rates. Even if you qualify, you may be required to take out additional financing that carries higher interest rates.
-No recourse. Unlike conventional loans, there are very few options for non-payment. If you don’t pay your loan you will not be able to sale your home. When a non-performing asset exists, a private mortgage lender may sue the owner. With a conventional home loan, the borrower has the option to sell the property and reclaim his payments from the buyer of record.
-No closing costs. When you take out a conventional home loan, the payment will include the closing costs. If you don’t have much money to put down, this can add up to a lot of money in one or two years. When using a private mortgage lender, the closing costs will be deductible from your monthly mortgage payments.
-High interest rates. Private home loans can have high interest rates, especially compared to conventional home loans. Some private lenders may charge as high as 25% or more. If you make payments only occasionally, you will not have to worry about these high interest rates. However, if you are a regular buyer and make all your payments on time, you could experience difficulty in meeting the payment requirements.
-Maxing out. Most conventional loans are set at a minimum credit score for borrowers. Some private lenders, however, have more lenient requirements for borrowers who have good credit scores.
-No prepayment penalty. Most conventional mortgage payment plans have some prepayment penalties. The prepayment penalties are applied when borrowers pay off their loans early. However, borrowers who want to get out of debt quickly should consider using a private loan that has a longer prepayment penalty.
-No documentation requirement. Unlike a conventional loan, most private mortgage offerings do not require you to submit any documentation to the lender for approval. This makes it easier for low-down-payment borrowers to apply for these loans. Moreover, the absence of documentation requirements could also help borrowers borrow a larger amount of money. Some private lenders require borrowers to prove their income or other factors such as financial hardship if they want to get a loan with a lower down payment.
-No PMI required. A private mortgage is different from conventional loans in the way that both loans typically require a PMI. A PMI is a short-term insurance policy. If you get a loan that does not require a PMI, you can avoid paying a lot of premium costs. Private lenders usually prefer borrowers with good credit histories, so they can offer them lower interest rates.
-No VA loan. Home equity and federal loans are considering government loans. If you get a home loan using a government loan program, you need to have a VA loan. You will only be able to avail of a VA loan on a VA-guaranteed mortgage. Many lenders allow you to select either the federal plan or the VA plan; however, the interest rates are usually higher on these two options.
-No Federal Housing Administration fees. Similar to conventional loans, FHA and VA loans also do not come with any federal housing administration fees. Many buyers qualify for financing without paying any upfront mortgage insurance fee. The FHA and VA guaranty loans, which mean the buyers can be rest assured they will be able to receive the funds they need. Buyers usually save a lot of money this way.