Qualifying for a loan on an investment property can be difficult for several investors, considering the rules and regulations required to meet, financial concerns for a down payment or credit ratings to qualify for a particular loan, so as you continue on in this article find out the difference and breakdown of conventional and non-conventional loans to give you a better sense of what to expect as you apply for a home loan.
Conventional loans are any mortgage loan that is not guaranteed or insured by the federal government however they are considered to be mortgage loans that follow the guidelines of government sponsored enterprises (GSE), such as Fannie Mae or Freddie Mac. The conventional loans are then broken down into conforming or non-conforming loans.
Conforming loans follow terms and conditions set by Fannie Mae and Freddie Mac.
Non-Conforming loans do not meet the requirements of Fannie Mae or Freddie Mac, but still considered conventional loans.
The conventional loan is typically recommended if the investor is unsure of their credit score or not financially stable to make a significant down payment. This loan is ideal for investors who need flexible payment options or looking to receive low closing costs.
Requirements of a Conventional Home – The home buyer must invest in at least 5% -20% of the sale price in cash for the down payment and closing costs. For example, if the sale price is $100,000 the home buyer is required to invest in at least $5,000 – $20,000.
Eligibility – This loan can be used to finance primary residences, second homes and investment properties, along with capabilities to purchase warrantable condos, planned unit developments, modular homes, family residence of 1-4 and manufactured homes.
Conventional Programs Offer the Following Loans –
Fixed rate loans – Most often Conventional Mortgages are fixed-rate mortgages and typically your interest rate will remain the same during the entire loan period. Of course in a fixed rate Conventional Mortgage you will always know the exact amount on your monthly payment and how many payments remain.
Adjustable rate loans – The initial interest rates and monthly payments for an adjustable rate mortgage (ARM) are relatively low, but can change throughout the life of that loan.
The non-conventional loans are just the opposite of conventional loans, as there can be several surprises appearing not to mention taking into consideration the adjustable rate mortgage (ARM) on this type of loan. The surprises of non-conventional loans are particularly directed towards those who are under in their mortgage. If you are considered to be one of those homeowners underwater in your mortgage find out if you’re required to any of the following:
1. Change in future interest rates
2. Loans of interest and principal never go down
3. Large payment due at the end of loan
4. Lender has authority to change amount you pay if certain instances occur.
The adjustable rate mortgage (ARM) begins with a rate that may start off low and could go lower, or higher, depending on several factors. This is the unknown for how much you will pay on the future of this loan. Two other types popular unconventional loans include interest only loans, and loans with a balloon payment (a big payment at the end of the loan period).
Requirements of a Non-Conventional Loan – According to Mortgage311, federally backed non-conventional mortgage loans frequently come with low or even no down payments as well as lower credit score requirements. For example, down payment requirements for FHA-insured mortgage loans can be as low as 3.5 percent. Qualifying credit scores for non-conventional mortgages, however, can be as low as 540, though lenders typically require a 640. Depending on the non-conventional mortgage loan product, interest rates may be higher than conventional mortgage rates.
Eligibility – Applicants for this loan will need to meet requirements, as not every loan product insured or guaranteed by the federal government is open to every homebuyer. For example, VA mortgages are only eligible to military veterans or family members. Mortgage loan products offered by the USDA typically are available to low-income rural homebuyers. The federal government’s main non-conventional loan product, the FHA loan, is open to almost all first-time homebuyers.
Whichever loan you choose or are required to apply for, be sure to do your research and understand the benefits, consequences and requirements before you become a home buyer. This breakdown of Conventional and Non-Conventional Loans should help prepare you for the “surprises” before unexpected interest rates rise or large payments are due at the end of your home loan.