An assessment of Conventional Home Loans by Romi Mayder

The current economic downturn has affected the realty sector the most, which is evident from the home mortgage crisis despite low interest rates. It is not only threatening the stability of the economy but also that of families and has impacted the ability to own new property. In this scenario how the age old or traditional methods of loans have been affected and what are the new strategies coming up to confront this crisis is something that needs urgent attention. There are basically three types of loans that one can apply for- Conventional loans; FHA insured loans and VA-guaranteed loans.

by

Romi Mayder

Conventional loans are those that are not insured or guaranteed by the federal government under VA (Veterans Administration) or FHA (Federal Housing Administration) or RHS (Rural Housing Service) of the US department of agriculture. However, govt. sponsored stockholder-owned corporations like Fannie Mac and Freddie Mac secure these loans. A conventional loan is a perfect option for those who are capable of making 20% down payment and require loan for the rest 80% of the cost of the property. It is considered to be less risky and does not require any insurance as compared to the new types of loans, often called the unconventional loans like the VA and FHA loans.

A conventional loan usually needs a set of pre-requirements to be satisfied before approval. Strict eligibility criteria are set up and the credit history of the loan seeker plays an important role in the approval process. The debt to income ratio is another important factor that is evaluated so as to decide your capability of repaying the loan amount. But one of the advantages of choosing a conventional loan is the low interest rate, since a big part of the amount is already paid as the down payment.

Conventional loans are best suited for those who meet the eligibility criteria since the interest rates have dropped down in the recent past, due to the competition with unconventional loans. Another advantage of a conventional loan is that you are free to choose between fixed or adjustable rates for monthly installments. A fixed rate means fixed amount to be paid every month but if you think your salary is going to rise over time then you can opt for a balloon payment, that is your per month installments would be low but at the end of the loan period you would have to pay off the balance all at once.

In the ongoing time of recession, the availability of conventional loans has been seriously affected. Also meeting up with the strict eligibility conditions is getting difficult thus people prefer unconventional loans like VA and FHA loans. FHA is the only government agency that operates without the money generated from taxes but on a self generated income. Unlike conventional mortgage lending FHA doesn't use credit score as the determining factor while deciding the validity of the loan application. Instead it looks into factors such as consumer's file, payment history and the overall worthiness of the loan seeker. Fannie Mac and Freddie Mac have come up with a scheme called Home Possible, to compete with FHA. In the current situation of "home mortgage meltdown", there is stiff competition going on between the conventional and FHA and VA loans. But despite the abysmally low interest rates people are not applying for home mortgages. One of the options that are becoming popular these days is refinancing of homes at lower interest rates so as to generate some money out of it. Nobody knows how long this home mortgage crisis will last as it has been the worst in the last 30 years and mos people are clueless whether this time is best for buying property or not.

About the Author

I specialize in US mortgage ratres