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The Difference Between Conventional and Non Conventional Mortgages

The Difference Between Conventional and Non Conventional Mortgages

Simply put, a conventional mortgage is not backed by the government while non-conventional mortgages are backed by the government. Examples of non-conventional mortgages include the FHA, VA, USDA and HUD Section 184 programs. Almost all other loans are conventional mortgages . Non-conventional mortgages usually require borrowers to pay extra upfront and/or ongoing fees in addition to their monthly payment but usually charge lower mortgage rates because they are insured by the federal government. Borrowers typically prefer conventional mortgages to avoid the extra fees involved with most non-conventional mortgages. The tables below summarize numerous conventional and non-conventional mortgage programs including key loan features.

As outlined below, there are different types of conventional mortgages and some conventional mortgages charge higher mortgage rates or fees depending on the loan amount and type, loan-to-value (LTV) ratio and borrower credit profile.

Conforming mortgage : In the 48 contiguous states, Washington D.C. and Puerto Rico, this is a mortgage with a loan amount of $548,250 or less. In Alaska, Guam, Hawaii and the U.S. Virgin Islands this is a mortgage with a loan amount of $822,375 or less. Conventional conforming mortgages typically require an LTV ratio of 97% or less, which means you are making a down payment of at least 3%, and a borrower credit score of at least 620, although certain conventional loan programs allow lower credit scores or non-traditional credit profiles. You are usually required to pay private mortgage insurance (PMI), which is an ongoing monthly fee in addition to your mortgage payment, on a conventional loans with an LTV ratio of greater than 80%.

Lenders also typically require the borrower to demonstrate the ability to afford the monthly payment and repay the mortgage according to Qualified Mortgage guidelines. These guidelines also require that the length of the mortgage is not longer than 30 years and the loan must amortize, which means you payoff your loan balance in full with your final payment.

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