Mortgage 101: What is a Conventional Loan?

Posted by Laine Smith on 10/7/14 10:00 AM

Topics: Home Buying

With the vast array of mortgage products on the market, as a potential homebuyer you may be asking yourself: “which one is right for me?” The tried-and-true conventional loan is a great mortgage to consider depending on your current financial and credit situation and your homeownership goals.

Conventional

Definition

Conventional mortgages are home loans insured by private companies instead of a government entity, like VA and FHA loans. A conventional loan follows guidelines set by Fannie Mae and Freddie Mac. Conventional loans are subject to conditions established by the lending institution and state statutes.
Conventional loans give borrowers the option of having a fixed or adjustable rate mortgage, as well as choosing a loan term:
Adjustable Rate Mortgage (ARM)
Adjustable rate mortgages have interest rates that are fixed for a specified term, typically 3, 5, 7 or 10 years, and then adjust annually based on changes in a pre-selected index. ARM’s have lower interest rates during the fixed initial term than fixed rate mortgages.
Fixed Rate Mortgage (FRM)
Payments and interest do not change over the term of the loan in a fixed rate mortgage. No matter the term of a fixed rate mortgage, the loan is fully amortizing. A 30-year fixed mortgage is the most common FRM, but many term options, like a 15-year fixed mortgage, are available.

Requirements

On top of the ability to choose a loan term and an adjustable or fixed interest rate, conventional mortgages differ from government insured loans in regards to requirements of the borrower, including:

  • Down payment. Conventional borrowers must put down a minimum of 3 percent of their purchase price, which can be entirely gifted from a relative.
  • Interest rate. Interest rates vary for conventional borrowers based on credit score and loan term.
  • Mortgage insurance. If a borrower has less than a 20 percent down payment, they will be required to pay mortgage insurance. Mortgage insurance premiums vary based on down payment amounts but are only monthly or single premiums; FHA loans require upfront and monthly mortgage insurance premiums.
  • Closing costs. Unlike a government-insured USDA loan, conventional mortgage closing costs must be paid at settlement and cannot be rolled into the mortgage.
  • Types of purchase. Unlike most government-insured loans, conventional mortgages can be used for investment property and second homes.

Overview

Conventional mortgages are a great option for borrowers with good credit and financial reserves for a down payment of 5 percent or more. Mortgages are not a one-size-fits-all product. To determine if a conventional loan may be the right mortgage for you, speak with one of our mortgage bankers.

Looking for more information on homebuying? Our Mortgage 101 Handbook is the ultimate guide for first-time homebuyers.

Download: Mortgage 101 Handbook

 

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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