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Conventional Loan

In our complex financial industry today, there are many loan programs available to the consumer.  The conventional loan has been around longer and proven itself better than any other loan.  Your parents and grandparents likely had a conventional loan way back when they purchased their homes, and it is still the most widely used loan product today for a new loan or a mortgage refinance.   

Conventional loans are fixed rate loans that run for terms of 15, 20, or 30 years.  The conventional loan programs are quite standardized and require standard information for qualification.  The interest rates for these loans, whether getting a new loan or mortgage refinancing are based on the market’s prime rate.  If you have bad credit, you will probably not be able to get a conventional loan.  You need to have a good credit rating, a reasonable debt to income ratio, a secure job history with steady income, and you need to be able to put down between 10 and 20% of the amount of the loan as a down payment.  This type of loan will only lend 80-90% of the total value of the property you are trying to get financing for.   

When mortgage refinancing, you may not need the down payment if you have enough equity in the home when they process the loan, or if you are doing a streamlined refinance through your current lender.  Conventional loans can be obtained for a mortgage refinance, a bad credit mortgage loan or a new home purchases.  Most lenders offer the conventional loan because it is standardized and fairly straightforward.  It is expected that the conventional loan will be around for many years to come, as it has already been used so widely in the past.  The lender takes a reasonable amount of risk for this type of loan and the borrower begins with equity, which puts him in a good position right from the start.   

Because nearly all lenders offer conventional loans, they are each competing for your business.  This helps keep the fees and rates lower.  The consumer gets the benefit of this competition; since it helps you get a lower interest rate so your monthly payment will be lower.  It also helps keep the fees and points the banks charge to write and process the loan much lower, which also helps you not to have to come up with so much for closing costs.  You will want to shop around for the best interest rate and the lowest closing costs, while still making sure you are getting the same type of mortgage for the same number of years etc.  Also be sure to ask a mortgage professional to explain the APR to you instead of just looking at the simple interest rate, when comparing costs.