A conventional mortgage is a type of home loan that is not guaranteed or insured by a government agency. These mortgages are typically offered and funded by private financial institutions, such as banks, credit unions, and mortgage companies. Conventional mortgages are the most common type of mortgage in the United States.
Here are some key characteristics of conventional mortgages:
- No Government Backing: Unlike government-backed mortgages, such as FHA (Federal Housing Administration) loans or VA (Department of Veterans Affairs) loans, conventional mortgages do not have government guarantees. This means that if a borrower defaults on a conventional mortgage, the lender does not have federal insurance to cover the loss.
- Credit and Down Payment Requirements: Conventional mortgages often have stricter credit score and down payment requirements compared to government-backed loans. Borrowers typically need a good credit score and the ability to make a down payment, which can vary but is often around 20% of the home’s purchase price. However, there are some conventional loan programs that allow for lower down payments.
- Private Mortgage Insurance (PMI): If a borrower puts down less than 20% of the home’s purchase price, they may be required to pay for private mortgage insurance (PMI). PMI protects the lender in case the borrower defaults on the loan. Once the borrower’s equity in the home reaches 20% or more, PMI can typically be canceled.
- Loan Limits: Conventional mortgages may have loan limits imposed by the financial institution or by secondary market entities like Fannie Mae and Freddie Mac. These limits can vary by location and are subject to change over time.
- Fixed or Adjustable Rates: Conventional mortgages can offer both fixed-rate and adjustable-rate options. Fixed-rate mortgages have a stable interest rate over the life of the loan, while adjustable-rate mortgages (ARMs) have interest rates that can change periodically.
Conventional mortgages are popular among borrowers who meet the credit and down payment requirements and prefer not to pay mortgage insurance premiums associated with government-backed loans. They are also commonly used for financing both primary residences and investment properties.
Mortgage brokers, like Forever Home Financing, are able to shop around and compare offers from different lenders to find the best terms and interest rates for their specific financial situation.