A conventional mortgage is a home loan not insured or guaranteed by the federal government. Unlike government-backed loans such as FHA, VA, or RD/USDA loans, conventional mortgages are funded and serviced by private lenders, banks, credit unions, or mortgage companies.
Here are some key features of conventional mortgages:
- Down Payment: Conventional mortgages typically require a down payment, with the amount varying depending on factors such as the borrower’s credit history, the loan-to-value ratio, and the lender’s requirements. While conventional loans may require a down payment of as little as 3% to 5%, a larger down payment can help borrowers secure more favorable terms, such as a lower interest rate or avoiding private mortgage insurance (PMI).
- Credit Score: Conventional mortgage lenders typically have stricter credit score requirements than government-backed loans. While specific requirements may vary by lender, borrowers generally need a credit score of at least 620 to qualify for a conventional mortgage. A higher credit score can help borrowers qualify for lower interest rates and better loan terms.
- Loan Limits: Conventional mortgages have maximum loan limits set by the Federal Housing Finance Agency (FHFA). These limits vary by location and are adjusted annually to reflect changes in home prices. Borrowers seeking to finance amounts above the conventional loan limits may need to consider jumbo loans, which have different requirements and typically higher interest rates.
- Private Mortgage Insurance (PMI): If the borrower makes a down payment of less than 20% of the home’s purchase price, they may be required to pay 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, they may be able to cancel PMI, depending on the lender’s policies.
- Fixed or Adjustable Rates: Conventional mortgages offer both fixed-rate and adjustable-rate options. With a fixed-rate mortgage, the interest rate remains unchanged for the entire loan term, providing predictable monthly payments. Adjustable-rate mortgages (ARMs) have interest rates that fluctuate over time, typically after an initial fixed-rate period.
Overall, conventional mortgages provide financing options for borrowers who meet the credit and income requirements established by lenders. Borrowers should shop around and compare offers from multiple lenders to find the best conventional mortgage product for their needs.
