Conventional vs. Unconventional Loans

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Conventional vs. Unconventional Loans

In mortgage lending, there are two main types of loans: conventional and unconventional.

A conventional loan or conventional mortgage is a loan type that is offered by private lenders, such as banks, credit unions, and mortgage companies. Conventional loans are not offered or secured by a government entity, however they can be guaranteed by either Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac).

Conventional loans typically have a fixed interest rate that is higher than unconventional loans that are government-backed, such as an FHA loan. Fixed rate loans means that the interest rate does not change for the life of the loan.

Because Conventional loans are not government guaranteed, they typically have higher qualifying requirements for applicants.

It’s common for people to mislabel conventional loans as conforming loans. Conforming loans are a type of conventional loans, but not all conventional loans are conforming loans.

A conforming loan is a conventional loan with terms and conditions that qualify for Fannie Mae and Freddie Mac. These requirements are updated each year.  

Now let’s take a look at unconventional loans.  

Unconventional loans typically have lower requirements that applicants need to meet in order to qualify. Because they are backed by the government, applicants can qualify with a lower income and little to no down payment.  

These loan options are perfect for those with lower incomes and less than perfect credit scores.  

There are two types of unconventional loans: Federal Housing Administration (FHA) loans and Veterans Affairs (VA) loans.  

An FHA loan is insured by the FHA and only available through an FHA-approved lender. FHA loans are popular with first time homebuyers because they require a lower minimum down payment and lower minimum credit score.  

Buyers that get an FHA loan will also be required to purchase mortgage insurance. 

A VA loan is a mortgage program that offers products that are guaranteed by the U.S. Department of Veterans Affairs (VA). Its purpose is to provide current and past military personnel as well as their families with the ability to purchase a property that is their primary residence.  

Applicants for VA loans will need to obtain a Certificate of Eligibility (COE) to confirm that they meet the basic service requirements, and then provide it to their lender. 

Conventional and unconventional loans both offer a variety of loan options for property purchasers. Because rates and requirements change quickly, it’s important for loan providers and agents to remain up to date on these changes.