There are three major loan types: conventional, FHA, and VA. With this in mind, you might be asking yourself, “what does conventional financing mean?” Read on to learn more, and discover which mortgage option is right for you, based on your financial goals and investment strategy.
CONVENTIONAL FINANCING VS. SPECIALTY FINANCING
There are distinct differences between conventional financing and specialty financing. Before we get into how these different types of loans will affect your return on investment, let’s first discuss, a) the type of loan that you qualify for, and b) how the loan will impact your overarching investment strategy.
Conventional Financing Definition
Conventional financing can be defined as a mortgage that is neither backed by nor insured by the government. This includes government programs like: Federal Housing Administration, Department of Veterans Affairs, or the Department of Agriculture. Additionally, conventional loans tend to have fixed interest rates and terms that apply to the lifetime of the loan. More on that later.
Conforming vs. Non-Conforming Loans
A conventional loan is sometimes referred to as a “conforming mortgage.” The reason is that the type of loan conforms with Fannie Mae and Freddie Mac guidelines. These two government-sponsored enterprises buy mortgages from lenders before selling them to investors. Their purpose is to make mortgage loans more widely available.
And then there’s conventional or “non-conforming loans.” As their name suggests, these types of loans do not conform with Fannie Mae or Freddie Mac guidelines. Additionally, non-conforming loans typically have a higher loan limit than that of conforming loans.
Specialty Financing Definition
Specialty loan terms are non-conventional loans given to investors. Generally speaking, there is only one specialty loan that is given per property and there is often a 30-year fixed leverage term. The main difference between specialty financing and conventional financing are interest rates.
THE BASICS OF CONVENTIONAL AND SPECIALTY FINANCING
Conventional Financing
Conventional financing is often seen as a riskier loan since it’s not guaranteed or backed by the government. With this in mind, conventional loans typically require larger down payments, resulting in lower monthly payments. Additional features include:
- 80% LTV (loan-to-value ratio) purchase. 85% with PMI (private mortgage insurance). 75% cash out refinance. The margins between the 80 percent LTV and 85 percent with PMI can mean the difference between purchasing one investment property and two for some investors. The rates will vary based on credit scores, the investor’s net worth, and several other factors. You can always request that the PMI be removed after a certain amount of equity and / or time is achieved. PMI is also tax deductible on real estate investment properties.
- Credit Score Requirement is Unchanged. The credit score requirements can vary, however 620 – 650 is typically the minimum score needed for a conventional loan. If you don’t want higher than average interest rates, then you will typically need at least a 740 credit score.
- Down Payment. Conventional loans typically require a large down payment. While the percentage of down payment needed can vary, generally speaking up to 20 percent is required. The good news is, in recent years some lenders are offering a 3 percent down payment that is based on a low debt to income ratio, a high credit score, and substantial underwritten assets.
Specialty Financing
In many ways, specialty financing is similar to conventional financing, but with a few key differences.
- 30-year Fixed. Like conventional loans, this is the typical length of a specialty loan.
- Same Leverage. Oftentimes, specialty loans have the same leverage terms as conventional loans. However, while a cash out is typically capped at 75 percent with a conventional loan, sometimes a specialty loan can receive an 80 percent cash out.
- Prepayment Penalties Apply. Planning on paying off your mortgage loan early? Penalties may apply and can be equal to a percentage of the outstanding principal balance or equivalent to a fixed number of monthly interest payments. For instance, a 3% fee on a $300,000 mortgage would cost you $9,000.