Home Mortgages - Conventional Lending - The Pros and Cons

It seems conventional financing is the most sought after option when seeking a home loan for a purchase or refinance. This is not because it is the best choice. It has just been assumed to be the best option in most lending circles. Understanding what a conventional loan is will help you make an informed choice.

A conventional mortgage is any loan that follows Fannie Mae, Freddie Mac, or private label lending criteria. This includes subprime, negative amortization ARM's, jumbo, and interest only loans. Excluded loans are FHA, VA, USDA, business financing, and commercial loans.

Conventional mortgages offer definite advantages for some borrowers. One advantage is that there are no loan limit restrictions. This will not affect the average person, but if you are in the market for a home loan greater than roughly $800,000, this is your only real option.

Another advantage is the option of eliminating mortgage insurance, and not having your taxes and insurance included in your mortgage payment. These options are only available if you have a 20% equity stake. They are not options with many other types of home loans. Although you will not pay mortgage insurance for the duration of the loan, there will usually be an insurance cost. You will not be allowed to pay your taxes and insurance on your own. These payments must be included in your monthly mortgage payment.

If your income is not easily verified, conventional lending has alternatives that allow for limited or no documentation of income. You will need excellent credit and either a large down payment or a lot of equity due to the inherent risk to this type of lending. The interest rates are usually a bit higher due to this risk. Limited income, no income, or stated income loans are largely for self employed borrowers. A self employed person generally will not receive pay stubs or W-2's.

In today's market conventional home loans do carry some definite disadvantages. A major disadvantage is that the required equity stake is higher than on non-conventional loans. This means a purchaser will need to invest a greater down payment. Someone looking to refinance will need a higher home value vs. the loan amount requested. Credit underwriting is also stricter and current interest rates tend to be higher for those with average credit scores. The debt to income ratio is less flexible.

Understanding all of your options will help you choose the right mortgage for your needs and qualifications.