A Mortgage Without Many Restrictions: The Conventional Home Loan
In the most simple terms, a conventional home loan, or mortgage, is a loan sourced directly from a financial institution to a homebuyer and can be used for either purchasing or refinancing a home. This type of loan is available with either an adjustable interest rate or a fixed interest rate at a term of ten, fifteen, twenty, twenty-five, or thirty years.
A conventional home loan is not backed or insured by any government institution and is typically favored by borrowers with good, established credit and the funds to put up a significant down payment—typically 20% of the purchase price or more.
Because they are not backed or insured by the government, conventional loans typically carry fewer restrictions and requirements than VA or FHA loans.
Down Payment and Mortgage Insurance Requirements
The standard down payment for a conventional home loan or mortgage is 20% of the purchase price. But, if you don’t have twenty percent to put down on your new home, there are options available that will still allow you to procure a conventional home loan. With a conventional loan, you can have a down payment of as little as 3%.
But with any down payment less than 20%, mortgage insurance through a private insurance company must be obtained. Getting mortgage insurance can be accomplished with the help of your lender.
Under some mortgage programs, it may only have to be carried until 20% of the principle has been paid either through monthly payments, or through refinancing with equity.
Risk Factors Affecting Rates and Terms for Conventional Mortgage Loans
Conventional Loan programs can be tailored to many different degrees, which is why they are typically more attractive to buyers who are trying purchase distressed properties, second homes, time-shares, and other properties for which a government-backed loan would be challenging or near-impossible to obtain.
However, because of this, conventional home loans are also most affected by risk factors such as your loan to value ratio, credit score, property type, debt to income ratio, and other factors that play a part in the loan process.
Depending on the complete property and borrower’s credit picture, interest rates and other terms of the loan can vary dramatically from loan to loan.
Fannie Mae and Freddie Mac
The Federal National Mortgage Association, or FNMA, is commonly known as Fannie Mae. The Federal Home Loan Mortgage Corporation (FHLMC), is commonly known as Freddie Mac. Conventional loans receive the majority of their funding from one or the other of these institutions.
Both are government-sponsored enterprises that were founded during the Great Depression in order to expand the mortgage market when credit was very difficult to obtain.
Conventional Home Loans Aren't for Everybody, but Are Perfect for Many People
Buyers with good credit and the ability to make a solid down payment on their home may learn that they can find a conventional home loan at more competitive terms and rates than government-insured loan programs like FHA or VA loans.
Even if a borrower has less than the standard 20% down payment, agreeable terms may still be available on a conventional loan with the inclusion of mortgage insurance. Further, if the property has inherent issues, a conventional loan may be the only financing available.