In order to get the best deal on your home loan, you will most likely have to compare a conventional loan to the various government mortgages that you may be eligible for.
What is a conventional loan?
A conventional loan is a loan that is not backed by any government agency. This is also known as a vanilla loan because of its relative simplicity. The interest rates, eligibility requirements, and terms that are industry standard for the conventional loan often serve as a benchmark for government loans and other private real estate transactions.
What is a government sponsored entity (GSE) loan?
A GSE is a loan that is sponsored by a government agency: the exact opposite definition of a conventional loan. The real estate industry categorized these loans into these two major categories because of the relatively simple tier structure that it created for lenders.
Approximately 97 percent of all loans in the United States are backed by some government agency. Major GSEs that either directly loan or insure real estate transactions include Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration (FHA), the United States Department of Veterans Affairs (VA), the United States Department of Agriculture (USDA), and the Navy Federal Credit Union, among others.
Each of these institutions has programs that specialize in different types of borrowers. First time home buyers, veterans, low credit borrowers, and borrowers who have just suffered a bankruptcy are just a few of the client types that can apply for loans under specialized programs.
What are the advantages of a conventional loan?
The conventional loan is harder to get, but this may actually be an advantage. Because of the more stringent credit score and financial history requirements, conventional loan borrowers gain the leverage for better deals. They also gain the advantage of immediate equity in the real property because of the 20 percent down payment requirement that is usually imposed by the lender. All of these options add up to increased freedom, more financial leverage in the long term, and spending hundreds of thousands of dollars less in interest over the life of the real estate loan.
Borrowers who are in good standing can also get a loan much more quickly. This reduces the need for expensive bridge loans that other borrowers may require in order to move out of a property into another. Borrowers also face much less financial scrutiny and no limitations as to where they can buy or the size of the house that they purchase.
What are the advantages of a GSE loan?
A GSE loan has the advantage of being a less expensive loan to initiate. Lower down payment requirements, less stringent financial record requirements, and a lower minimum credit score make GSE backed properties accessible to borrowers that would not have normally been able to get into the real estate market. Lenders would consider these borrowers too high of a credit risk, and they would need to be all cash buyers just to get a small first home.
GSE loans also provide breaks on certain fees that borrowers would otherwise have to pay. The private mortgage insurance (PMI) payment that would normally accompany a down payment of less than 20 percent may be waived, and certain origination fees and closing costs may be completely eliminated, passed on to the seller, or rolled over into a loan in order to defer their payment. In short, the government uses its volume of business to allow borrowers to do things lenders normally would not let them do.
Should I choose a conventional or a GSE loan?
Just like there are advantages to conventional and GSE loans, there are also disadvantages. Although a GSE borrower gets plenty of relief in the form of deferred payments and waived fees, he will end up paying more a property than a conventional loan borrower, believe it or not. There are also the limitations of size and placement. For instance, a USDA borrower might not be able to purchase a $650,000 condo in Manhattan; it would simply not qualify.
You should choose a GSE loan or a conventional loan based on your personal needs. If you can qualify for a conventional loan, you should probably do it even though you face a higher scrutiny. Those minimums and requirements that you are forced to comply with save you money in the long run. These loans are also simpler, and you do not have to go through nearly as much red tape in order to get the process done.
However, if you cannot qualify for a conventional loan, finding the right GSEÂ loan program is a great option. You will be given leeway on fees that might keep you out of the market completely. You will also have the assistance of real estate professionals who will guide you through the process of buying the home. GSE loans are great for first time home buyers who do not have a credit history to show, as they can help to build a credit record.
You can always use GSE programs at first and refinance into a traditional loan if you are trying to build credit. You can also use combination loans that vary between programs.
2 Point Highlight
Major GSEs that either directly loan or insure real estate transactions include Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration (FHA), the United States Department of Veterans Affairs (VA), the United States Department of Agriculture (USDA), and the Navy Federal Credit Union, among others.
The private mortgage insurance (PMI) payment that would normally accompany a down payment of less than 20 percent may be waived, and certain origination fees and closing costs may be completely eliminated, passed on to the seller, or rolled over into a loan in order to defer their payment.
