Conventional, Subprime and Private Loans Defined
Written By: David Reed
Sunday, September 01, 2019
Conventional loans are those that are made by mortgage lenders where the lender assumes all the risk of making the loan. Should the loan ever go into default, the lender must recover the property and re-sell, hoping to recover enough through the sale to pay off the existing mortgage amount plus associated third party services needed to close the mortgage. These are by far the most common type of home loan. Lenders approve loans using established guidelines and once the loan is approved and funded, the loan is sold primarily to either Fannie Mae or Freddie Mac. Two-thirds of all residential mortgages made today likely adhere to Fannie or Freddie guidelines.
Conventional loans can be conforming, or they can be non-conforming. Those that follow Fannie or Freddie guidelines ldquo;conformrdquo; to issued requirements. There are several guidelines that must be followed. For example, in most parts of the country the maximum conforming loan limit is 484,350. When a lender approves and funds a conforming loan, it is sold to Fannie or Freddie, either individually or packaged with other conforming loans and sold in bulk. Jumbo loans can also be conventional, but the loan amounts exceed the conforming loan limits and not eligible for sale to Fannie Mae or Freddie Mac.
Subprime loans have been around for years to some degree and for a while were nearly non-existent. Today, theyrsquo;re often referred to as ldquo;non-primerdquo; which sounds a bit softer. Subprime loans are offered to those with lower credit scores. Such loans ask for a larger down payment to help offset some of the risk of making a loan to someone with low scores. Subprime loans will also carry higher interest rates compared to conventional mortgages. Most such loans are >
Subprime mortgage lenders cater to a specific market, although the market is >
Private loans are those issued by private individuals or companies. Private lenders can establish their own guidelines without any need to conform to another entitiesrsquo; guidelines. Private loans arenrsquo;t necessarily subprime but do provide financing options that do not fit conventional needs. Private lenders like to finance a property that needs some rehabilitation. Once a property has been acquired and rehabilitated, the owner of the property can then apply for conventional financing or otherwise sell the property. Private lenders look at the long term and not the current condition of the unit. A private lender must be convinced by the borrowers however the unit can be sold, or the private loan refinanced once the rehabilitation has been completed.
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